The subprime-mortgage problem has entered a third phase.
The first phase, needless to say, involved the decline in housing prices in the United States that crippled many homeowners' ability to repay their loans. Subprime lending schemes were based on the assumption that housing prices would continue to rise and interest rates would stay high. The collapse of both conditions created a sharp increase in sour loans.
The second stage was marked by the emergence of financial uncertainties surrounding housing loan securitization and collateralized debt obligations (CDOs) that in- corporated complex financial products. This phase affected not only financial institutions, but also the individuals and hedge funds who bought the products. Its global reach was so extensive that it affected Europe and some developing countries.