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The Financial Crisis is a situation where most of the financial institutions or assets lose large part of their value. The recent financial crisis has three main reasons 1.Real Estate Market Crisis 2. Large Economy moved into recession 3. Basic collapse of Financial Institution 1. Real Estate - Subprime lending (near-prime, non-prime, or second chance lending) is a financial term that was popularized by the media during the "credit crunch" of 2007 and involves financial institutions providing credit to borrowers who do not meet prime underwriting guidelines. Subprime borrowers have a heightened perceived risk of default, such as those who have a history of loan delinquency or default, those with a recorded bankruptcy, or those with limited debt experience. Subprime mortgages were actually intended to be temporary loans to borrowers who expected to sell the property early or increase their income soon after purchase. Many property investors, or flippers, also used subprime loans to finance their investment homes. Due to the rise of foreclosure associated with subprime mortgages, attention has been drawn to recent subprime lending practices. It has been suggested that some lenders engaged in predatory lending practices. More extreme allegations included lenders deliberately targeting borrowers who may not have fully understood the terms of their loan, or lending to people who were never likely to afford the interest payments in the long-run. Many of these loans included exorbitant fees and hidden terms and conditions, and they frequently led to default, seizure of collateral, and foreclosure. However, subprime loans are not necessarily predatory loans. A loan is only predatory if the borrower qualified for a better interest rate or loan product but was sold a higher-interest rate loan. A loan is not predatory simply because it has a high interest rate. The Wall Street Journal reported in 2006 that 61 percent of all borrowers receiving subprime loans had credit scores high enough to qualify for prime conventional loans. Subprime mortgages totalled $600 billion in 2006, accounting for about one-fifth of the U.S. home loan market. Generally, the credit profile keeping a borrower out of a prime loan may include one or more of the following: * Two or more loan payments paid past 30 days due in the last 12 months, or one or more loan payments paid past 90 days due the last 36 months; * Judgment, foreclosure, repossession, or non-payment of a loan in the past; * Bankruptcy in the last 5 years; * Relatively high default probability as evidenced by the credit score. * Accuracy of the credit line data obtained by the underwriter. Beginning in late 2006, the U.S. subprime mortgage industry entered what many observers have begun to refer to as a meltdown. A steep rise in the rate of subprime mortgage defaults and foreclosures has caused more than 100 subprime mortgage lenders to fail or file for bankruptcy, most prominently New Century Financial Corporation, previously the nation's second biggest subprime lender. The failure of these companies has caused prices in the $6.5 trillion mortgage backed securities market to collapse, threatening broader impacts on the U.S. housing market and economy as a whole. The crisis is ongoing and has received considerable attention from the U.S. media and from lawmakers during the first half of 2007. 2. Economy Crisis - the subprime mortgage crisis has had far-reaching consequences across the world. As the Tranches of sub-prime debts were repackaged by banks and trading houses into attractive-looking investment vehicles and securities that were snapped up by banks, traders and hedge funds on the US, European and Asian markets. Thus when the crisis hit the subprime mortgage industry, those who bought into the market suddenly found their investments near-valueless - or impossible to accurately value. Being unable to accurately assess the value of an asset leads to uncertainty, which is never healthy in an investment climate. With market paranoia setting in, banks reined in their lending to each other and to business, leading to rising interest rates and difficulty in maintaining credit lines. As a result, ordinary, run-of-the-mill and healthy businesses across the world with no direct connection whatsoever to US sub-prime suddenly started facing difficulties or even folding due to the banks' unwillingness to budge on credit lines. · Observers of the meltdown have cast blame widely. Some have highlighted the practices of subprime lenders and the lack of effective government oversight · Others have charged mortgage brokers with steering borrowers to unaffordable loans, appraisers with inflating housing values, and Wall Street investors with backing subprime mortgage securities without verifying the strength of the underlying loans. Borrowers have also been criticized for entering into loan agreements they could not meet. The crisis itself has a number of dimensions but three in particular are crucial. The first is the build-up of debt, both corporate and household debt, but especially household debt. Linked with this is the likelihood of a return to international monetary instability and of the refusal of the rest of the world to fund US (and UK) trade deficits. The third factor is the effect of the ecological crisis on the world economy, which brings with it the prospect of an end to two decades of low commodity prices. However, these should be seen as medium-term developments, determining the underlying tensions within which more immediate changes take place. The key development of the second half of 2008 has been a dramatic worsening of the first of the dimensions mentioned above; the financial crisis based on the accumulation of debt. The main cause of this has been growing recognition that the quantity of bad debt in the system was much larger than was previously thought. This in turn led to confusion amongst the US ruling class about the way to respond to the rising number of loan defaults. Unwillingly forced to nationalise the mortgage companies Fannie Mae and Freddie Mac (largely as a result of pressure from Chinese and Japanese investors in these companies) they then switched abruptly to allowing a leading investment bank, Lehman Brothers, to fold. The immediate effect of the recognition of the bad debt in the housing market is that a large amount of capital which was valued at a certain amount, on the basis that the housing loans would be repaid in full, is no longer worth what was originally envisaged. This capital falls into two categories. Firstly, there is the capital directly tied up in providing housing linked to sub-prime mortgages, both the loan capital used to provide the mortgages and capital employed in construction and housing development. Secondly, there is the capital in other industries which has been invested in the expectation of demand originating from a booming housing market; in particular that which depends on high levels of demand resulting from homeowners borrowing against the equity in their houses - something now unlikely to happen in the foreseeable future.
3. Financial Inst - The financial sector has been quite brazen about trying to shift the cost of the crisis onto labour - even to the extent of formulating plans to use taxpayers' money to maintain bonus payments. The mechanisms for ensuring this shift include the following: * Direct subsidies for the banks funded by the taxpayer * Rebuilding of the profit base by refusing to pass on interest rate cuts to borrowers. This may well be made easier by mergers like the Lloyds-HBOS merger, which will reduce competition and increase the dependence of households on a small number of large institutions * An attack on the job security, wages and conditions of bank staff in order to cut costs. Again, state-sponsored mergers may help this process by providing the means to close branches. * Reduction of the interest rate paid out to savers and depositors To the extent that the state has attempted to act as something other than an agent of capital and to enforce terms on the banks, the banks have responded by threatening to bring the system down if they don't get their way. This has led to some conflict between the government and the banks, particularly with regard to the enforcement of cuts in interest rates. However, the cuts which have been achieved here have come at the expense of even larger cuts in rates paid to savers which have serious implications for both current and future pensioners. In addition, the bail-out as a whole has resulted in a considerable ideological cost both in terms of the reputation of the financial sector within society as a whole (which is probably now at an all time low) and in terms of the increased legitimacy of regulation and even state ownership. It appears most likely at present that the injections of funds made so far have restored a measure of stability to the banking system.

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Q: What are the causes of global financial crisis araised in 2008 up to nowaday?
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