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Many economists believe that the main reason behind housing bubble was caused by low interest rate set up by the Federal bank. The interest rates were reduced to 1% from 6.5%, this made people to mortgage their property against the loan. The banks in return encouraged everyone to obtain loan against their mortgages because real estate prices were at its peak. [] When inflation began in 2004, US federal withdrew monetary accommodation, they started increasing the interest rate and mortgages payment also started rising apparently. Tight money policy came into play and there was a great demand of money and therefore house prices fell. Banks and other financial institutions financed at very low rate, and when interest rates started raising there were heavy chance of default by the subprime borrowers thus default by such borrowers led to losses. Though the loans were secured and were sold to special institutional vehicles (SIV’s) the losses were still bourn by banks and other institutions


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