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Question by dance_hall_qween: How are sub prime loans, the US mortgage situation, the credit crunch , and Northern Rock related?
How are sub prime loans, the US mortgage situation, the credit crunch , Northern Rock and the loss of city jobs related ?why is this all very important? and what does this say about the state of the economy?

Best answer:

Answer by chonudi
All of these are related through generous and risky lending practices.

In the competitive US mortgage lending market, lenders relaxed their lending requirements and allowed buyers with poor credit (also known as sub-prime borrowers) to borrow upto 95% of their homes’ purchase price. Such loans were often linked to floating interest rates.

As interest rates increased, the monthy payments on those mortgages also increased. Those homeowners who barely afforded their monthly payments at the time of purchase could no longer afford them and hence defaulted.

Similar to mortgages, the defaults on automobile loans has also increased substantially. I believe the same is true for credit cards.

A pessimist would say that the economy is not as healthy as the government says it is. In general, individuals are borrowing more and over-extending their finances.

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