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more US citizens becoming indebted

A large chunk of consumer spending is on the purchase of homes and obtaining mortgages. Housing in turn fuels appliance sales, home furnishings and construction. In 1940 44% of US citizens owned their own homes, by 1960 62% of Americans owned their homes. Currently nearly 70% of all housing is owned by its constituents. The increase in home ownership has resulted in more and more US citizens becoming indebted, US household debt is $11.4 trillion (2006). This is a staggering figure considering 20% of US households now have more debt then assets. This debt represents enormous confidence in the future of the economy because the actual money doesn’t exist. This debt is seven times the amount of dollars in circulation (M1 Money Supply), which is only $1.3 trillion (2007). Lenders assume the money will exist when it comes time for people to repay their debts. The importance of the consumer to consume to the US economy was outlined by Richard Robbins expert in anthropology in his award wining book ‘global problem and the culture of capitalism,’ ‘a couple of days after the al Qaeda operatives crashed two planes into the world trade centre on September 11th US congress members met to plan a message to the stunned public. “We’ve got to give people confidence to go back outside and go to work, buy things, go back to the stores, get ready for thanksgiving, get ready for Christmas,” said one member of congress, echoing the message of the president ‘get out’ he said “and be active members of our society.” (CNN 2001).

‘The fact that after one of the most shocking events in US history government officials were urging citizens above all to shop and work is ample testimony the significance of consumption in the effective working of our economy and indeed for the whole society.” Creating the Sub­prime Market The Sub‐prime mortgage market differs from the prime (primary) market as it comprises all those people who do not meet the criteria for a mortgage in the mainstream market. The adoption of the Depository Institutions Deregulatory and Monetary Control Act in 1980 was part of the deregulation drive that eliminated many restrictions to lending, this resulted in loans reaching unprecedented levels which led to the mainstream mortgage market becoming saturated and reaching its peak of profitability. Those with patchy credit histories and of low income were turned away from mainstream mortgages at a time when the market was buoyant due to consumer spending and borrowing.

The Sub‐prime market was carved out after this point as 25% of the US population fell into this category and represented a market opportunity. Hence US lenders gave mortgages to people who had little means to pay for a mortgage and charged them a rate of interest much higher than the commercial rate due to the increased default risk. They issued these mortgages safe in the knowledge that if the buyer defaults, then they would be able to repossess the property, and sell in a buoyant property market. By the start of 2007, the sub‐prime market was valued at more then $1.3 trillion. Traditional banks stayed away from this risky market and instead remained focused on prime lending and questioned some of the business practices of sub‐prime companies such as their aggressive lending and accounting practices. Between 1994 and 1997 the number of sub‐ prime lenders tripled, going from 70 to 210. Because such institutions were not banks they possessed no customer deposits and in order to expand many lenders turned to the stock market for funding. Companies such as Money Store, AMRESCO Inc, Dallas and Aames Financial Corporation, all raised capital through placing some of their companies on the stock market. Relatively young lenders such as Long Beach Financial Corporation; Irvine, California‐ based New Century Financial Corporation; Delta Funding Corporation; and Cityscape Financial all took their companies 100% public.

By the end of 1997, the top 10 lenders accounted for 38% of all sub‐prime lending. The collapse of the Russian rouble and long term capital management in 1997 resulted in a number of foreclosures leading to the demise of six of the top 10 sub‐prime lenders. This left an enormous vacuum in the sub‐prime industry that resulted in a series of acquisitions by commercial banks such as Washington Mutual's acquisition of Long Beach Financial Corporation. Associates First Capital, the third‐largest sub‐prime originator at the time, was purchased by Citigroup Inc. In 2001, Chase Manhattan Mortgage Corporation acquired Advanta Mortgage Corporation, the 16th‐largest sub‐prime lender at the time for $1 billion. In 2003, HSBC Finance Corporation acquired sub‐prime powerhouse Household Finance, which had earned the rank of largest sub‐prime lender in the two years prior to its acquisition by HSBC.
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