By early 2008, more than one in five subprime mortgages was delinquent or in some stage of foreclosure. The crisis appears to be spreading beyond the subprime market.
As home prices fall and lenders impose tougher standards in response to defaults, some prime borrowers holding adjustable-rate loans are finding it difficult to refinance, which many of them had expected to be able to do before their rates reset. As defaults and foreclosures increase, investors in mortgage-backed securities also face steep losses.
Colliding forces
How could problems with sub-prime mortgages, which represent a relatively narrow slice of the overall home finance market, have such a profound effect on the economy at large? The answer lies in what many observers characterize as a perfect storm of economic and market forces.
While a few analysts focus on the role of one or more particular players in the mortgage meltdown, from borrowers to lenders to mortgage brokers, most attribute the crisis to a host of factors. These include but are not limited to historically cheap credit, innovations in financial products that increased the availability of subprime loans, and the rapid run-up and subsequent fall of housing prices.
Not ready for prime time
Evidence suggests that during the years leading up to the crisis, some home buyers who may have qualified for prime loans may have been offered riskier — and more lucrative — subprime loans by unregulated lenders and mortgage brokers. At the same time, opportunistic borrowers, seeking quick profits from flipping properties, took on substantially more debt than they could handle.
