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What is the credit crunch?

Date Published : Tuesday, February 05, 2008

Hundreds of thousands of Australians could lose their homes during this year because of rising interest rates and increasing debts as a result of the recent credit crunch.

As many as 300,000 Australian families may be affected if the joint research by JPMorgan and Fujitsu Consulting is correct, with as many as 750,000 homeowners feeling "mortgage stress"

But, what is the credit crunch and why is it affecting people not just in Australia, but all around the world?

The effects being felt now can be traced to a series of events which occurred in September 2006. A large number of home repossessions across the US led the booming housing market to burst and the increases in variable rate home loans.

Homeowners could not cope with the rising rates and many fell behind on their repayments The mortgage lenders that retained credit risk (the risk of payment default) were the first to be affected, as borrowers became unable or unwilling to make payments.

Many of Australia's largest financial institutions - including Commonwealth Bank and HSBC - have close ties to the US property market and, as such, have had to raise the variable rates on home loans to recoup losses. This has, in turn, destabilised the world markets and produced much tighter credit conditions.

Fujitsu Consulting analyst Martin north told the Sydney Morning Herald: "This is a problem that is now hitting middle Australia. I don't think that the full impact of the credit crunch has yet been disclosed and it will get worse."

Tough times are still ahead for all Australians.

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