The credit crunch Flashcards
What is a credit crunch?
refers to a sudden shortage of funds for lending, leading to a decline in loans available
Where did the credit crunch start?
In the USA
What were the central interest rate in the USA?
About 1% they were low.
Because central rates in the USA were low what did it mean for banks?
Banks borrowed at low cost so they could issue loans and make money.
How did banks make more money to issue loans?
The banks would issue mortgage loans to borrowers and then sell the mortgages to investors to give them more cash to loan. ( like a certificate sold to investor for money).
If borrowers defaulted on their loans what could investors do?
They could reclaim the house and sell it on the market and make their money back. Prices were going up in them times.
Who did banks give loans to?
Subprime people ( low income, poor credit history and first time borrowers)
What became common with Mortage loans?
Defaulting on mortgage loans became more common with the distribution of sub-prime mortage.
What happened to the housing market?
The supply of houses increased, which led to a collapse in house prices.
What did a fall in house price mean?
investors lost the value of their investment.
Because investors lost the value of their investment what did it lead to?
They couldn’t repay their own loans ( they took at to buy from banks) meaning they went bankrupt.
