• Historical view
• Signs of the crisis
• Synthesis of the crisis in the United States

Synthesis of the crisis in the United States

The market of the « sub-primes » is constituted of a majority of risky loans that can be mortgage (real estate), of car renting, credit cards and others, granted to customers who are not much solvent or who have a difficult credit history. This type of market has widely spread in the United States since 2001, going from a sum of 200 billion USD for mortgage loans in 2002 to 640 billion USD in 2006, which represented 23% of the total of the home loans subscribed.

Generally, organisms of high risk loans can contract a mortgage on the market, at a revisable interest rate and it is generally indexed (for example on the guiding rate of the Fed), overcharged by a « sub-prime » that can be really high.

Typically, the first years of a loan (usually until five) are covered by a fixed promotional interest rate and it then becomes variable. American mortgage holder organisms can borrow up to 110 % of the value of the object of the mortgage, with the possibility to only pay back the interest part of the monthly payments, an interest that is actually totally tax-deductible.

First of all, the rates that are historically low, which encourage credit institutions to increase the part of the sub-prime in their portfolio and to take advantage of the important margin of risk imposed to those credits, have encouraged the growth of the market. This use has been encouraged by the increasing demand of profitable products by investors and the inflow of available liquidities looking for attractive investments. Some financing establishments specialized in the granting of sub-prime credits immediately sold back on the market of securitization.

This kind of loan participated to the creation of a real estate bubble which was itself feeding the credit bubble: as long as the real estate grows, the purchased house is mortgaged and he insures that the operation will end well, in case of bankruptcy the bank will be able to pay back the credit by seizing and selling the house.

The durability of this system depends on two conditions: on the one hand, on the interest rates relatively stable, and on the other hand, on the regular evaluation of the real estate. And yet,

As a result, borrowers ended up facing an increase of the monthly payments while the value of the good was decreasing; the most fragile were unable to face their commitments. In isolated cases, the default on payment is covered by the creditors: thanks to a policy of risk management, organisms are supposed to be able to bear a necessary delay for the recovery of the debtors’ claims. But when we arrive to a phenomenon of a massive default on payment, the creditor organism can end up in a difficult situation. And yet, in 2007, the non-repayment on such credits came up to 15%.

The value of houses became inferior to the credit they had to guarantee by the decline of the American real estate market. Thus, creditor organisms, supposed to be able to get their investments back by selling the mortgaged houses, ended up without any rapid way to put their balance sheet back on its feet, because selling those goods was no longer enough to cover their losses, and it was taking some time to reach it. The inflow of the putting up for sale of goods seized has even aggravated the unbalance of the real estate market where prices collapsed.

August 2007, a specialized website mentioned that a million defaults of payment were noticed, but each failure report does not lead the creditor to bankruptcy. Banks usually try to find solutions of loans rescheduling when they think the debtor is only going through a temporary period of difficulty.