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Impact of Global Financial Crisis on Housing Finance

Impact of Global Financial Crisis on Housing Finance

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This is about the impact of global financial crisis on housing finance.
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03/26/2014

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The broken dream of homeownership for US
low-income households

Te subprime crisis put an abrupt end to
many low-income households’ dreams of
homeownership in the USA. Foreclosure
rates deteriorated rapidly (foreclosure refers
to loss of title on their home by a defaulting
mortgage borrower). In the third quarter of
2007, subprime adjustable rate mortgages
(ARMs) only accounted for 6.8 per cent of
the total outstanding, but accounted for 43
per cent of all foreclosures. In October 2007,
the delinquency rate on subprime ARM

FIGURE 5: Properties with Foreclosure Activity in the USA

Source: http://upload.wikimedia.org/wikipedia/en/4/4c/Foreclosure_Trend_-_2007.png

239,770

333,627

800,000

700,000

600,000

500,000

400,000

300,000

200,000

100,000

Q1 07

Q2 07

Q3 07

Q4 07

Q1 08

Q2 08

Q3 08

446,726

527,740

649,917

739,714

765,558

7

CHAPTER ONE THE GLOBAL FINANCIAL CRISIS

mortgages almost tripled compared with
2005. In Tis rate increased to 21 per cent
in January 2008, and to 25 per cent over the
following four months. During 2007, lenders
started foreclosure proceedings on about 1.3
million properties, a 79 per cent increase over
2006.12

Te number of properties involved in
foreclosure steadily increased (Figure 5).

Oversupplies of US dollars and Euros can

wipe out growth in developing countries

Te global financial crisis can be detrimental
to growth in developing countries. When
the United States and the European Union
respond to their problems with massive
increases in their respective money supplies,
this erodes the value of the hard-earned US
dollars and Euros developing countries have
accumulated through exports of goods,
services and commodities. Tis transfer of
domestic problems from one country or a
few countries to many developing countries
and from a few people to virtually everyone
through the inflation mechanisms, making
the latter the main victims of a financial crisis
for which they have no responsibility. Tis can
not only affect people’s quality of life, but also
affect people’s confidence in governments. It
can affect political and social stability in
the long-term. Terefore, the negative long
term impacts of stimulus packages requires
particular attention. Tight financial regulation
can possibly have better long term impacts
than short term stimulus packages.

Oversupplies of currencies distort the real
economy

Te oversupply of currencies can be
reflected in the rapid growth of the financial
assets compared to the value of total outputs
measured in national accounts over the past
few years. In 2006, global financial assets
were equivalent to four times the world’s
production of goods and services. On any one
day of April 2007, the average daily turnover

in interest rate and non-traditional foreign
exchange derivatives contracts reached US
$2,090 billion, or 71 per cent higher than
three years earlier. Tat was 50 times the value
of world exports during the same time. Te
total assets held by hedge funds increased from
US $39 billion in 1990 to US $1,900 billion
in 2007. Te profits of financial institutions in
the United States amounted to 41 per cent of
total profits after tax in 2007, up from a mere
5 per cent in 1982. In New York, one third of
all salaries paid were in the financial sector.13

A rapid increase in unemployment

Te International Labour Organisation
(ILO) found that the global financial crisis
could increase world unemployment by an
estimated 20 million.14

Tis would bring the
total number of unemployed in the world
to over 200 million in 2009.15

However, the
situation seems far worse. Te unemployment
caused by the global financial crisis will be
far more than the ILO’s 20 million figure.
In China alone, the crisis led to the closure
of more than 67,000 small and medium-sized
enterprises and 20 million people lost their
jobs. At the time of writing, another 300,000
small enterprises were partially closing down.

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