The global financial crisis (GFC) starting in 2007
2.The global financial crisis (GFC) starting in 2007
nThis crisis is said to originate from the collapse of the sub-prime loan market in the USA which had been funded by mortgage-backed securities. Borrowers were not able to make their loan repayments and property prices were falling.
nA sub-prime loan is typically made to people on low incomes or with poor credit records. The interest rate on this loan can be very low for the first few years but then increase considerably in later years.
nA mortgage-backed security is an interest rate instrument (e.g. a bond) that investors buy and the money is used to fund housing loans (also known as mortgages).
a)What could a bank do if a borrower cannot pay the repayments on a mortgage?
b)What would be the impact of falling property prices?
The Asian financial crisis and the GFC are described on pp.36-38 and pp. 5-9 in the Viney (2015) textbook.