The crisis is the result of a bubble on the US housing market, which predates the turn of the millennium when the Dotcom balloon bursts.
In order to mitigate the economic downturn, the Federal Reserve has resorted to the “base rate” reduction tool and in just over a year has reduced its “key central bank base rate” from 6.5% to 3.5%. Following the events of September 11, 2001, the stock exchanges experienced further falls and the economy continued to slow down. The Federal Reserve reacted with further interest rate cuts, and the “base rate” dropped to 1% in June 2003, a half-century low. This was followed by a gradual rise in interest rates, raising the “base rate” to 5.25% in June 2006. The first interest rate cut did not take place until September 2007 after the outbreak of the crisis.
Thanks to low interest rates
There were plenty of cheap sources in the economy, which led to a significant surge in lending. Along with the saturation of the market, fierce competition between banks for lending has started and, in the absence of proper regulation, this has led to an increase in the number of bad loans, which are not backed up adequately. These were so-called “subprime” loans. The housing market was the biggest winner in the boom in lending, where the market value of second-hand homes increased by more than 50% between 2000 and 2005.
As the value of homes grew faster than the cost of credit
The purchase of investment homes became more significant, further increasing the bubble. (In 2005, 40% of homes sold were for investment purposes. As a result of the gradual rise in the “base rate”, the installments of loans to households and businesses began to decline. eventually led to a collapse in property prices.
The bank can only offer a higher amount if the applicant also collects a second property. There will be no change in this matter, the previous 80% limit will remain.