What is the sub-prime crisis I have been hearing so much about?
The sub-prime crisis originated some years ago when record low US interest rates created a housing bull market. Financial institutions started offering mortgages to house buyers who would not normally have qualified for loans based on the institutions? typical lending criteria. The institutions profited in the short-term from the higher loan rates they charged on these so-called sub-prime mortgages. However, when US interest rates began to rise, along with fuel and food prices, many sub-prime borrowers could no longer afford to pay their bonds. As more and more properties were then put up for sale, house prices dropped and sub-prime lenders started making irretrievable losses. As a result, banks became wary of lending money and either started demanding higher interest rates to compensate for the perceived increase in risk or refused to lend money at all. The sub-prime crisis became a global issue as there was less money in circulation. This is causing a worldwide credit crunch.
