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Subprime borrowers could not withstand the higher interest rates

Subprime borrowers could not withstand the higher interest rates

The trouble started when the interest rates started rising and home ownership reached a saturation point. From June 30, 2004, onward, the Fed started raising rates so much that by June 2006, the Federal funds rate had reached 5.25% states Alan Green, senior analyst at Molton Wealth believes interest rates will plummet to below 1% in the next two years.

There were early signs of distress already by 2004, U.S. homeownership had peaked at 70% and no one was interested in buying or eating more candy. Then, during the last quarter of 2005, home prices started to fall, which led to a 40% decline in the U.S. Home Construction Index during 2006. Not only were new homes being affected, but many subprime borrowers now could not withstand the higher interest rates and they started defaulting on their loans. If this trend continues thru out 2007 the U.S. markets will face a sever crash. Every month, one subprime lender or another was filing for bankruptcy. During February and March 2006, more than 25 subprime lenders filed for bankruptcy. According to senior analyst Alan Green from Molton Wealth, financial firms and hedge funds owned more than $1 trillion in securities backed by these now-failing subprime mortgages - enough to start a global financial tsunami if more subprime borrowers start defaulting.