The housing credit is one area of finance that has been adversely affected by the downward spiralling of the housing prices. As the number of people who are able to purchase homes reduces, so has the demand for homes hence leading to a fall in the housing prices. As forfeitures increase, so has the supply of the houses hence making the prices reduce accordingly. Considering that real estate makes up a large portion of the overall economy, the withdrawals of home equity and related real estate activity have had a major impact on the economy (Business week). This is likely to cause a slowing of the economic growth. Investors require higher return rates on their credits as well as increasing the cost of capital on both individuals and corporations. This will make most companies stop borrowing capital and therefore halt economic expansion and growth.
In February 2007 the first effects were felt in the financial markets. This was when the world’s largest bank HSBS wrote down $10.5 billion of its subprime related MBS holdings. During the same year, over 100 mortgage companies were either shut down or were sold. The crisis caused a panic among investors who then took their money out of mortgage bonds and equities and opted to put it into commodities. Default in mortgages and the provisions for default caused a reduction in profits at the US depository institutions to drop from $35.2 billion in 2006 to $646 million in 2007 .In 2008; Lehman Brothers collapsed bringing the crisis to a new level. Other financial institutions also failed and in a two day period in September 2008, money funds totalling $150 billion were withdrawn from USA. Due to this a credit freeze developed due to lack of money for lending to banks and other firms this credit freeze affected the whole global economy almost destroying it (Christopher 2009).
The lending business
When the crisis hit, low house prices and high interest rates led to defaulting that ultimately led to the subprime mortgage market collapse. During this time, investors were scared thus subprime lenders could not get rid of their rapidly devaluating loans. Many lenders as a result went bankrupt an example being New Century. Even though subprime mortgages account for only a small percentage of all mortgages, their defaulting resulted in a chain reaction. Overall house prices dropped hence homeowners found it better to default on their mortgages. As a result, holders of subprime-backed securities lost vast amounts of money.
The subprime crisis led to a total financial crisis that affected businesses everywhere. Most businesses were operating at a loss and access to loans was difficult and very risky. In response to this, the business industry started firing people in order to avoid bankruptcy and to boost up their profit (Dianna B. & Henrique 2008). This resulted in a very large number of people to become unemployed and since businesses could not hire graduating students had a very difficult time securing a job. The nation employment rtes hiked up during this period and held for some time before the stimulus package was enacted.