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The Mortgage Default Crisis

In one of our earliest News articles, on 28 March 2002, we warned about the abnormal rise around the world in house prices. Our closing comments were "Consumers have been extending mortgages through home-equity loans and rock bottom interest rates. This has helped consumers maintain spending despite recessionary trends. This cannot go on forever as eventually spending and income have to come into balance." (See http://www.findem.com.au/news/displayArticle.php?id=69 for the News Item).

Central banks knew about this but they rationalised that it as Ok because net household equity was still positive. But while that may have been so in aggregate, it was not necessarily always so in many individual households. Fair trading regulators did nothing about the predatory selling practices of mortgage brokers who sold 'sub-prime' loans to people at the end of the boom who could not really sustain repayments. As with stock market booms the poor and financially illiterate get sucked in at the top. Now with the loud clang of stable doors shutting after the horse has bolted, central banks are shelling out money like Christmas to prop up financial markets and shaky mortgage based 'banks'. This also cannot go on forever.

Posted Saturday, 22 September 2007

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