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Unfortunately, the lenders got carried away with this and started extended these risky loans to more people than ever before. By 2006 an unprecedented number of loans were subprime and by 2007 a large percentage of these loans were in default. Most of these subprime loans were in the residential housing market. The price of housing was on the rise in the late 1990s, as more and more of these loans were given to people who did not have the credit or the income to qualify for normal loans. When the price of housing started to drop homeowners found they owed more on their loans than the property was worth and they started to default on the loans. In addition, many subprime loans had adjustable rates, which means the monthly payments increase with time. People were led to believe they could refinance their loans into fixed rates before the payments got too high, but that did not work out for a majority of them. When their monthly payments jumped far beyond their potential to pay, the foreclosure crisis began. Today's economic unrest actually began with the credit crunch of 2007. In turn, the credit crunch 2007 was caused by loose subprime lending practices by lenders who saw the potential to make big profits off origination fees on these loans. They were able to collect the fees from opening up the loans and then sell the loans to investors, bringing in cash flow they could use without waiting for the loans to be paid back. The foundation of all of this was the housing market, and that did not hold up as we all know from the credit crunch 2007. Extending risky loans to people who had proven track records of defaulting, and who often did not have the income to sustain the loans to begin with, is the root to much of the economic unrest spinning around the world today. |
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