Fall of the sub-prime market - 2

I have got unfinished business.

So, I am back to finish the story of the fall.
Since 2000, the property prices in US were going up due to increased demand and the interest rates were going south. Together these 2 factors made sure that people invested even more to make a quick buck.

In 2004, as fed started raising interest rates in US to counter the inflation and control the economy, the mortgage rate also started rising. Increasing interest rates and stabilizing prices in home markets, slowly made people realize that perhaps they will not make as much money as they expected from their investments in property and some of these people started selling, putting more pressure on prices.

Also higher interest rates made sure that the credit unworthy people default due to higher installments. So all in all situation was getting similar to what we have in Indian markets now. Indian property market has seen tremendous growth in past few years and now with higher interest rates and credit crunch, we are preparing for a fall in prices.

So in brief, prices started going down causing foreclosures (where banks come and claim your house against default of loan). Banks were happy as they thought the houses will pay for the loans but as situation worsened prices dropped even more and banks could not find buyers for these properties. The spiral downwards had begun.

Now lets look into the payment for those institutions that had invested in CDO's. Remember, the regular payment to these institutions was to be sourced for installments against the loans. Now after defaults people stopped making installments and as banks could not sell and make payments, these institutions started claiming their insurances or CDS. This lead to further pressure on insurance companies and on banks causing them to go bankrupt.

AIG and Lehmann are just 2 examples. We will be talking on this insurance game later on as well. But well that perhaps is an abrupt ending for this post.