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Credit crisis: are you feeling the crunch?
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Credit crunch and sub-prime mortgages


The financial crisis that is sending shockwaves around the world started with the sub-prime crisis in the US. In an attempt to boost the economy post-9/11, banks started handing out toxic mortgages to high-risk borrowers (households with low incomes and/or poor credit ratings) to help them get a foot on the property ladder. 

This policy boosted the US enconomy between 2003 and 2006, but then house prices started to fall. People who had taken on high mortgages saw the value of their properties drop, and interest rates started to increase. As a result, households who had taken on variable rate mortgages found themselves having to pay higher repayments for properties whose value was crashing.

By 2007, significant numbers of these households could no longer keep up their repayments. As homeowners defaulted on their mortgages, the banks who had lent them money foreclosed the properties and sold them off at slashed prices. The banks tried to refinance thir heavy losses from other banks, but couldn't because banks simply stopped lending to each other. 


Sarah Horrocks
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