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Subprime Mortgage: The Cause of 2008 Financial Crisis Explained

You might have come across the term called credit score often. This score mainly defines whether an individual or a company is worth giving the loan. The company with a higher credit score can more likely get a loan quickly with fewer interest rates. This is because these companies have been paying their dues on time and have never missed a financial payment. The loans given to them are called Prime loans. Subprime loans are given to those who have a low credit score. In return, the companies charge a higher interest rate to cover the risk. Companies with a low credit score are known to miss their regular payment or making late payments.

Such companies are also not able to complete the repayments of the loans due to which their credit score further decreases. We all know about the financial crisis that hit the global market in 2008. The term used for that global letdown of the market was known as a recession. During this time, many companies went bankrupt, and the well-reputed companies lost a lot of value in their shares. Also, the Stock Trading market was going under colossal loss. The main reason for this kind of downfall in Stock Trading was majorly Subprime Mortgage. For example, Lehman Brothers, which was the fourth-largest US investment bank, had to file for bankruptcy during this time.

They provided a lot of Subprime loans at a higher interest rate than they were unable to recover later. This led to a loss of a lot of funds, and they had to file for bankruptcy. This was not the situation just with Lehman Brothers but many other companies as well. During this time, many different financial companies around the globe were suffering from the same problem, Subprime mortgage and. Financial institutions from all over the world were trying to recover bad loans and were unable to do so. Due to this, many companies had to file bankruptcy which caused a massive downfall in the investment market and Stock Trading globally.

Many institutions that survived the recession period have learned their lessons from the incidents and have placed stringent policies to provide Loans. Subprime loans still exist in the market, however, after the event where many financial companies had to file bankruptcy, the terms and conditions have now been revised to lower the risk of the bank, in situations where the person is unable to pay the loan. Due to Subprime mortgage, Stock Trading market over the world was severely affected. The trading volumes went down to a record low, and the market value started decreasing all over the world. It not only changed the financial companies but all those companies that were available for Stock Trading. The market value of shares across the globe and for various companies went to an all-time low.

Stock Trading was considered to be money-making the market, but after the incident of 2008, it was looked at like a hazardous investment type, and people were later more hesitant to go for Stock Trading as an investment option. With a global downfall, the Subprime mortgage was almost removed at that time, as it was looking more like a threat to the economy and the market of a specific country. The things took a couple of years to stabilize, and the next subprime mortgage was brought back into the picture. However, due to the problems faced by the markets last time, the policies and terms and conditions for subprime loans have been changed. Subprime loans are not recommended and provided by many banks as they are considered to be a risk factor. People who are into Stock Trading believes that the market needs these kinds of loans as well to increase the flow of money. The main thing that the financial institutions are working on is to provide loans only to those who can give repayment guarantees. Many banking firms provide Subprime loans based on a warranty. The company looking for a mortgage can provide a guarantee through its physical property or on behalf of the shares and their value in the market. It would vary depending on the agreements made between the financial institution and the company who wants the loan.

The most affected part of the Recession in 2008 was the Stock Market. Stock Trading was severely affected, and the stock market plunged twice and even thrice for some countries. Since the problem affects the global market, Stock Trading volumes, almost went to a third and most of the transactions was that of selling where people were taking their money out and were not investing in the market anymore. The situation case a significant low in Stock Trading markets all over the world, which further impacted the exchange markets globally. It took a lot of time and a couple of years to regain the trust of investors in Stock Trading. The market began to rise slowly and steadily to make the market reach its earlier position.

Most of the companies, be it a smaller one or one of the oldest, works on the mortgage. They would never use their funds unless it is necessary. Since most of the companies are using a mortgage to expand and operate, it is one of the most dynamic industries in the market. Therefore, any impact on it will affect the position of other companies as well. Since all major companies are in debt by one or the other financial institutions, only one of them failing will also affect other companies. It is a constant cycle of funds through which a lot of industries and companies are earning. However, since the financial crisis of 2008, companies have been very strict with their policies and have made sure to decrease the risk in every mortgage they approve. They are now meticulous in identifying whether the company will be able to repay the entire amount. The conditions now for the market have been improving and growing at a sustainable rate.

 

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