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October 10, 2007

US sub-prime crisis at halfway point

by Gill Montia

Story link: US sub-prime crisis at halfway point

Standard & Poor’s, the credit ratings agency, is predicting that the mortgage crisis in the US is likely to worsen because the level of fraudulent lending to unsuitable borrowers is much higher than previously estimated.

Based on a number of surveys, it would seem that fraudulent lending in the US sub-prime sector increased sharply in 2006.

Some brokers and mortgage lenders did not require proof of income and others helped borrowers to obtain loans by inflating their salaries on application forms.

The disastrous effects of these practices remained hidden while house prices were rising because borrowers could remortgage their properties and pay off the loans with the proceeds.

However, as house prices began to stagnate, or even fall, the number of defaults increased rapidly.

According to David Wyss, chief economist at Standard & Poor’s, defaults on sub-prime mortgages will continue to increase, adversely affecting the US economy and causing the global credit squeeze to continue.

Mr Wyss believes that losses in the US sub-prime sector will peak in 2009, meaning that the crisis is only halfway through.

With foreclosures expected to rise in the US, house prices could fall further and this would increase the losses of the institutions that have invested in mortage-related securities, such as sub-prime-backed bonds.

 

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