The financial crisis in Britain has been due to the subprime mortgage. The subprime mortgage has been an ongoing financial crisis in U. K. there before but has come to be more apparent in the year 2007. It has been characterized by contraction in liquidity in the banking market and global credit markets triggered by the mortgage company failures, government sponsored enterprises and investment firms which heavily invested in subprime mortgages. The subprime mortgage crisis has passed through several stages that have exposed the Britain to financial weaknesses.
This kind of crisis began to burst in U. S.with high defaults rates on adjustable rate mortgages and suprime loans. For a number of years prior to that financial crisis of 2007, there was an increasing loan incentives such as easy initial terms decreasing the level of money giving standards, and long term rising trend of house prices that encouraged borrowers to assume mortgage difficulties in believing that they would be able to refinance quickly at more favorable conditions (Alex, 2008, p. 16). However, when the interest rates started to rise and the price of houses started to go down moderately in 2007 in many places in U. K. , there came the problem of refinancing.
Foreclosure and defaults activity went up dramatically due to expiry of the initial terms a situation that led to the failure of the home prices to go up as anticipated. The acceleration of foreclosures in U. K. in 2007 triggered the financial crisis in Britain. The major banks in Britain and other financial institutions reported losses of large sums of money which led the central bank in U. K. to have liquidity concerns. To solve this issue, the central bank provided liquidity to its member banks so as to encourage lending to the worthy borrowers and also keep the faith in commercial paper market.
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The Britain government bailed out the major financial institutions by assuming significant addition of financial commitments (Fisher, 2006, p. 4). The financial market crisis created risks to the border economy and downturn of housing market which were primary factors in many decisions by the U. K. In Britain, there have been subprime mortgage loans which have been made to borrowers who are not able to qualify more stringent criteria as a result of limited credit history even before 2007. These kinds of loans are at a high rate of default compared to prime mortgage loans and their prices are based on the risk the lender assumes.
Therefore, it is as a result of the subprime mortgage loans by the U. K banks that have lead to the 2007 financial crisis. Individuals in Britain who have experienced severe problems of funds have undergone difficulty of obtaining credit so as to purchase large items worthy large values of money. Previously, these individuals could have lost their jobs or experienced unexpected medical services or marital problems which are unforeseen thus causing financial setback (Ellickson, 2006, p. 15). Due to all these circumstances occurring in Britain, it has lead to late payments, charge-offs bankruptcy and repossessions.
As a result of the previous credit problems, the same individuals in Britain may have also been precluded from getting any kind of conventional loan. For this demand to be met, a tiered pricing arrangement for lenders that allowed these individuals to get loans pay interest rates which were higher at higher fee allowed loans that otherwise may not occur (Barrell, Holland, 2007, p. 17). Subprime lending in Britain evolved when it was realized that market place demand for loans to less than ideal customers and those with imperfect credit were able to be funded with loans.
When the prime interests were low, many companies entered the market and therefore real interest rates were negative allowing subprime rates which were modest to go well. Accessing the increasing market in Britain, lenders took at hand on the risk associated with giving money and other assets to people who had poor credit ratings. This was synonymous to lending money to customers who were substantially credit unworthy. The subprime loans carried a greater risk as a result of the aforementioned credit risk characteristics of the subprime borrower (Byrne, Diamond, 2007, p. 19).
For the financial crises to arise, lenders gave subprime loans opportunities to borrowers with less-than-ideal credit record to become homeowners. The borrowers in U. K. used this credit to purchase homes or paying for living expenses, remodeling home, purchasing other luxurious commodities in cases of cash out refinances or using the finances to settle down high interest credit cards. However, as a result of the risk profile in the subprime mortgage borrowers, this credit access came at higher price of the interest rates, high fees, and also other increased costs to the British.
This subprime mortgage lending in Britain provided a method of credit repair when the borrowers maintained payment records which were good. In United Kingdom, many subprime mortgage loans where formed to promote residents with features that could trap borrowers with low income into increasing their loans yield terms that eventually went beyond the ability of the borrower to make the repayment. Most of these loans that were given came for the need of selling them into securitizing conduits, which were for the special purpose entities that gave out Residential Mortgage Backed Securities (Peterson, 2000, p. 14).
In the year 2007, the subprime mortgage have made the credit histories in U. K. to be weak that included the payment delinquencies and even very severe problems which include their judgments, charge off and also bankruptcies. They also displayed a reduction in repayment capacities which was measured by the credit scores that is implied by debt-to-income ratios. In the same period, many subprime mortgage loans in Britain started to sprout forth in the market. The market became more competitive as more vendors penetrated the market forcing the mortgage loan issuers make them more attractive to the Britain consumers.
This has led to financial problems in Britain making it difficulty for them to obtain credit finances (Cocheo, 2007, p. 100. In 2007, the historical biography of the financial market within the subprime mortgage in the U. K. entered what may be termed as a meltdown. The very steep rise in the rates of subprime mortgage foreclosure and defaults contributed even to further downmelts in the Britain’s financial market. A mixture of low rates of interests, large foreign inflows of funds led to the creation of credit conditions that were easy for many years thus leading the financial crisis.
It is well evidenced that the subprime borrowing was a main cause of the increase in rates of home ownership and the housing demand. The demand ideally increased the prices of houses and the spending of the consumer. The home owners used the property increased value that was experienced in housing bubble so as to refinance their homes at low rates of interest rates and also take second mortgages against the value added by the use of the funds value for the consumer spending (Alexander, et al, 2002, p. 16).
During this period of booms, the high rate of building later lead to a surplus in the Britain economy in terms of more home inventories. It therefore caused the home prices to decrease. With easy credits together with the assumption of the price of houses will have to appreciate, it actually encouraged many subprime borrowers to get adjustable- rate mortgage that they could not manage to repay after the period of these initial incentives. When the price of houses in Britain began to go down moderately, refinancing became an increasing problem.
The refinancing by some home owners was difficulty since they were unable, a situation which drove towards high default on their loans. The same loans were set back to higher rate of interest and amount of repayments. The increase in the rates of Foreclosures made the supply of the house inventory to increase substantially. There was a significant downward pressure on prices as a result of the excess supply of the house inventories. Due to the price decrease, many homeowners were at default and foreclosure risks.
The prices of houses are expected to continue going down until when the inventory of the extra homes is cut down to more typical levels (Johnson, 2007, p. 8). Another contributing factor for subprime mortgage that lead to the financial crisis in Britain was the speculation in the real estates. Speculators in 2007 left the market which led to collapsing of investment sales to a much far than the primary market. At these moments, houses were not treated as investment kind of stocks. It was therefore followed by changes in the house owners’ behavior during the boom period.
Some risks were identified by subprime mortgage companies inherently in this activity. The investors highly assumed in multiple leveraged positions. This speculative borrowing in Britain led to accumulation of debt eventually resulting to the fall in the asset values. The speculative borrowing in Britain could have been contributed by the following three types of speculative borrowers. Firstly, the hedge speculative borrowers who usually borrow with the aim of settling the debt from cash flows which are from other investments.
Secondly, the speculative borrowers who base their borrowing on the believe that they can use the loan to service the interest but they must continue to have new investments by rolling over the principal. Thirdly, is the Ponzi borrowers named by the John Keynes after the name Charles Ponzi. This speculators relies on the value of the asset in terms of its appreciating pay off or re-finance the debt but unable to repay the original loan (Brummer, 2007, p. 5). As the subprime mortgage crisis in2007 continued, mortgage lenders responded to it appropriately.
The number of lenders decreased and the amount of lending shrunk. The major players and movers in the finance industry which included the banks completely altered their mortgage products. Other lenders in Britain completely withdrew their provision in some particular product of mortgage. These changes experienced in products lineups were mostly as a result of booms in the services demand. This shrinking in the lending sector was as a result of the reduced lending amounts from the mortgage lenders. This extended to banks themselves by giving smaller amounts of loans to one another.
The process of mortgage lending was also directed and governed by the economic financial controls in the believe that the real cause of such problem was due to increased demand of capital investment. Not only in these mortgage sectors, but also other dealers of finance deviated from lending generously. They adopted the ‘old pre-crisis period’ lending mechanism. During the period, it therefore became a great challenge so get credit cards and even personal loans with the economy characterized by such severe phenomenon (Weale, 2007, p. 14).
The scenario in Britain made a big transfer of the burden to major lenders and Wall Street investors at the very bottom of supprime market. It consequently implied that the non traditional mortgage borrowers were the moderate and the low homebuyers and homeowners. These people failed to pay the loans as they were faced with familial foreclosure. They were also exposed to victimization focus and aggressiveness but uncountable mortgage broker salesmen received commission which was enormous on loans and had no associated risk after paying back the payments.
Borrowers in Britain had a false enticed ideology of riches by accumulating and escalating properties and home assets or cash available for running what was braded as no finances cost. The borrowers failed to know the conceptions of the possible accumulated costs. Many borrowers were unable to pay back their loans which led to the failure of the mortgage markets (Peterson, 2005, p. 17). Basically however, there should be no much blame to the subprime mortgage lender though it led to the 2007 financial crisis in Britain. Rationally, this is because the lenders acted as a beacon of hope for homebuyers by offering these mortgages.
The diversification and the competition in this mortgage sector pushed the companies to lend in a more conscientious manner. Before 2007, homebuyers characterized by immobility and low income could not take mortgage of low interest rates at local area which they lived in. By the nature of this fiasco, extensions were structured and implemented to give room for the participation of all the people in the society regardless of their status and the allocation. Homebuyers made large deposits as they took mortgage due to the reason that nobody cared their pay back capability.
They really enjoyed the times when they were engaging in mortgage activities that had multiples of annual salaries given at low interest rates as compared to the regime shortly before the crisis began. The problem affected not only the borrower and lenders but also lenders transacting with the rest of lenders within the financial market (Alex, 2008, p. 12).
Alex Brummer (2008) The People Pay the Price. New Statesman, Vol. 137, January 28, pp. 12, 16 Alexander William, et al (2002) Some Loans Are More Equal than Others: Third Party Originations and Defaults in Subprime Mortgage Industry.
Real Estate Economics, Vol. 30, pp. 16 Barrell Ray & Holland Dawn (2007) Banking Crises and Economic Growth. National Institute Economic Review, pp. 17 Brummer Alex (2007) A Failure of Regulation: There is a Bank Crisis in Britain Every Decade-But in the case of Northern Rock, Gordon Brown’s Actions as Chancellor Are Coming Back to Haunt Him. New Statesman, Vol. 136, September 24, pp. 5 Byrne Peter & Diamond Michael (2007) Affordable Housing, Land Tenure, and Urban Policy: The Matrix Revealed. Fordham Urban Law Journal, Vol. 34, pp. 19
Cocheo Steve (2007) Can Subprime’s Casualties Be Saved? ABA Banking Journal, Vol. 99, pp. 10 Ellickson Robert (2006) Unpacking the Household: Informal Property Rights around the Hearth. Yale Law Journal, Vol. 116, pp. 15 Fisher Keith (2006) Toward a Basal Tenth Amendment: A Riposte to National Bank Preemption of State Consumer Protection Laws. Harvard Journal of Law & Public Policy, Vol. 29, pp. 4 Johnson Ivory (2007) How the Mortgage Crisis Is Affecting You: Upheavals in the Housing Market Are Affecting Homeowners of All Income Levels. Ebony, Vol. 63, pp. 8
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