| Bad credit mortgage generally involves increases in | | | | affected, because at that time most mortgages |
| interest rates, together with a reduction in the | | | | originated at savings banks. |
| availability of credit. Whether bad credit mortgages | | | | One typical pattern of bad credit mortgages is that a |
| cause a real economic downturn depends on the | | | | business expansion leads to increased demands for |
| severity of the crunch and the availability of alternative | | | | borrowed funds by business for fixed investment and |
| sources of funds. | | | | to finance mortgage increases in inventories. Then |
| The low risks and added convenience that banks | | | | banks find their bad credit mortgage rising on loans and |
| offered depositors were overwhelmed by the higher | | | | they become more cautious in their lending strategies. |
| returns available elsewhere. Banks suffered from | | | | This is particularly the case when the collateral is risky, |
| disintermediation - depositors' withdrawals of funds to | | | | as it is for loans to finance inventory. Businesses find it |
| purchase higher-yielding mortgage securities. As | | | | difficult to obtain loans from their usual lenders, while |
| savers looked for higher returns outside of banks, the | | | | alternative sources of funds demand higher mortgage. |
| flow of funds to banks fell along with the amount of | | | | They decide to cut production to reduce inventory and |
| funds that banks could make available for loans. | | | | increase cash flow. |
| Monetary policy had also become restrictive and the | | | | The effect of bad credit mortgages has usually been |
| growth rate of mortgages fell sharply. There was not | | | | to reduce investment and real output. Bad credit |
| a major downturn in the economy at that time, since | | | | mortgage can play an important role in the cycle of |
| the funds that were being withdrawn from banks | | | | inventory investment that we described earlier, but this |
| were still available through other financial institutions. | | | | is not always the case. |
| However, mortgages and the housing market were | | | | |