An interesting feature in the crisis faced by the United States real estate market has been that over 80% of the mortgages that were issued in favor of the subprime borrowers involved adjustable rates of mortgages. Problems with such rates are that it resets with the corresponding fluctuations in the market rates. With the rates being readjusted to higher rates, mortgage lender started finding that the delinquencies are on the rise.
Consequence of the developments was that securities that were backed by subprime mortgages those held by the financial firms started losing value. Banks started losing huge amount of capital. Fate of government sponsored financial institutions was no better. Hence the credit facilities were tightened around the world. With financial support dwindling, prices of housing started on a downslide.
Immediate cause of such crisis was the housing bubble that took place during the years 2005-06. High default rates on subprime as well as adjustable rate started increasing quickly. Many people had accepted loans on mortgage of the houses in anticipation that they would be able to repay the loans in time and also obtain finance on better terms. Instead the rise of interest rates and fall of prices of houses started affecting the prospects adversely giving rise to such crisis in the mortgage market.
As refinancing became difficult to find, the crisis deepened further. Offshoot of such situation was a dramatic rise in defaults and foreclosures. Since the home prices did not go up as expected and the comparatively easier initial phases of the loans granted expired, problems of refinancing continued growing.
With homes becoming less in worth in comparison to mortgage loans given by the mortgage lender , borrowers started entering into foreclosures to get rid of the problems. Resultant foreclosure epidemic still continues to plague the financial world.
Adverse effects of such situations are compound. On the one hand it kills the buying powers of the consumers and on the other hand it drains away the financial strength as well as stability of financial institutions.