US Subprime Mortgage Meltdown 2007

US Subprime Mortgage Meltdown

1.Introduction
It is exactly ten years after the Asia Financial Crisis in 1997, US subprime mortgage crisis started in 2007. Perhaps ten year a cycle is coincident, but most peoples would agreed economy cycle is real. The financial crisis in Mexico in the 1980's, the Asia financial crisis in 1997 and the US Subprime Mortgage crisis in 2007. With the globalized financial systems, the crisis provide many opportunities for many smart hedge fund managers and short term hot capital fund. Some peoples argued that short term hedge fund speculators is not the cause of financial crisis, but most peoples would agree it can cause distability and subsequent lack of confidence in the financial systems.

2.US Economy
US economy have enjoy a boom period in the last decade, US private corporate sector are the prime mover of the economy, lead by the technology stocks and financial service sector. The movement of short-term funds into US economy immediately after the Asia financial crisis is evident by the strong US currency and stock market performance before the Subprime crisis. As a result, the US financial system are enjoying extra liquidity and money supply in the economy.

3.The Cause of the Subprime Crisis
3.1.The Lenders
With the extra liquidity in the system, the Subprime lenders have deliberate relax the lending rule and guideline and due diligence are sometime not the prime criteria for the lending institution. The unprecedent surplus supply of fund available to the mortgage providers, the lenders are prepare to lend the borrowers with poor credit record without regard to their ability to repay.

3.2. The Borrowers
The easy access of fund together with the minimum initial deposit requirement for the house purchasers have encourage the peoples to speculate in the property market beyond their mean of repayment. In addition, the lower interest rate from the lending institution have encourage the existing house owners to refinance their house. The borrowers believe that their house value could keep appreciating in value over time or at least at par with the compounding factors of rate of interest and inflation rate.

3.3.Economy Factors
With the global competition from the east asia coutries, like China and Vietnam and the emerging India as the main competitors in the technology sectors for investors, US mainland have experiencing economy down turn. This was further aggregated by the surging of crude oil price in recent years before the crisis. Some argued that financial burden in the Iraq war is also a contributing factor.

4.The Consequences
With slowing down of US economy, the borrowers start to default their loan repayment. Many of the top subprime leaders are either gone out of business or scaled down their business. The closing down of some lending institution have sent fear to the financial system with the possible lack of trust and confidence from the depositors and investors of the institution, which could in turn create a panic if without a government involment or guarantee at least in the short and medium term.

The Subprime mortgage meltdown have inevitable affecting the stock market, the price of major financial institutions got the first hit. Some economist and analyst have predict a possible short term economy recession and increase of unemployment rate in the US.

5. The Government Involvement
To restore the public confidence, particularly the depositors and investors of the financial institution is paramount important. the US government have pledged to pump US$250b into the banks through direct investment as shareholders (preference shares) of the banks. The government involvement in the private US corporations or nationalization is objectionable to many Americans, but this time in the national interest and to avoid a possible collapse of financial system, the government involvement is allow at least for a short and medium term.