The Credit Crunch in the U.S.

Research Description and Objectives 2

The American economy is currently in a credit crunch, meaning that credit is very difficult and expensive for consumers to obtain. The key causes of the credit crunch include making loans to consumers who previously would not have qualified (sub-prime loans), falling home prices, and easy access to an excess of credit. A chief consequence of the credit crunch includes investors moving away from mortgage-backed and credit card-backed securities. To avoid a similar situation in the future, creditors need to re-examine and modify their lending practices and consumers need to understand their financial situation better, including the terms of their loans and their actual ability to repay their obligations.

The media has given much attention the credit crunch in the American economy and the challenges facing consumers. News reports detail foreclosures on homes and the difficulties that ordinary Americans are having as their watch home prices and the equity that they have in their homes fall. Other consumers are forced out of their homes even as they struggle to decide whether to file bankruptcy or face cutbacks at their jobs. There is debate about whether the economy is in

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rge purchases of boats, cars or other items that they might otherwise have not bought. The result was that lenders were writing loans they would not have written previously and consumers were taking on higher and higher levels of debt ("No Need" n.p.). Over time, however, the sub-prime loans turned out to be problematic for borrowers. Those with low initial rates saw their rates increase to levels that made the loan impossible to maintain after the first few years. Others faced balloon payments that required refinancing at higher rates. At the same time, the economy slowed and some workers were laid off, putting economic pressure on them to sell their homes. Home prices began dropping at the same time that some consumers were facing problems with their loans, putting additional downward pressure on prices as homeowners tried to sell their homes while they could still realize some gain in equity ("Sub-Prime" n.p.). Although few consumers are aware of it, mortgages are not just a simple transaction between the consumer and the lending institution. Mortgage-backed securities are a popular investment vehicle for institutional investors from around the world. Typically, mortgages are viewed as safe investments

Category: Business - T