Foreclosures Echoes around the World

Posted on February 2nd, 2009 by saman

The foreclosures crisis in the United States of America relates in particular to a peak of the unpaid credits. This situation began in the second half of 2007, on a segment representing 15% of the total foreclosure market, but which is now responsible for more than half of the total unpaid loans.

During 2003-2005, on a market with low interest rates (there are views according to which rates have been too low for too long), due to the recovery from the crisis in the IT field, many investors who have suffered losses have found refuge in what they have considered safe investments, namely those in the properties area.

Their faulty reasoning has been that the value of a property, which is something tangible and concrete unlike an online portal, will increase in time and in any case, it will not fall significantly.

Based on the foreclosure mortgages demand which is growing, which has risen property prices, lenders have been increasingly willing to accept special and flexible mortgage products, but risky. Such credits have been benefiting from low initial interest rates and 0% advance but in time, owners cannot pay regularly much higher rates. Many consumers are not even asked to certify their revenue. The flexibility of the products in combination with interest rates at a so low level have pushed people to foreclosure investments, which has continued to fuel demand and prices, creating a vicious circle of borrowing and lending unconsciously and irresponsibly. Thus, out of the past crisis in the IT field, a new problem has issued. The crisis in the U.S. foreclosures market has infected credit markets around the world.

Because of the sophisticated global credit markets, the most risky foreclosures sold by local banks in this period have been quickly resold to some financial institutions that have gathered more products of this kind, have divided them and mixed them with other complex lending products known as “derivate products.” Then investment banks have sold these hybrid financial products to investors at prices, which have been under the risk of the market systematically fed by overall debt.

When the initial rates of special foreclosures have finished, usually after 6 to 12 months since the granting of the credit, borrowers have no longer paid their loans, and their number has been rapidly increasing. Meanwhile, liabilities supported by foreclosures are no longer profitable. The virus of foreclosures has started to infect portfolios around the world. Total failure in estimating the risk of the debts on the foreclosures market in the U.S. has triggered a crisis of confidence spread throughout the global foreclosure market, resulting in a “fear” of credits known as the Credit Crunch, which is a financial crisis. The effect has been totally opposed, loans from international markets becoming very expensive.

This crisis has severely limited access to money allocated to loans, known as “liquidity.” Banks in different countries, which face high costs for borrowed liquidities from creditors outside the country, must pass those costs to consumers in the form of higher interest rates for foreclosures and consumption.