Subprime Crisis

Only available on StudyMode
  • Download(s) : 65
  • Published : December 25, 2008
Open Document
Text Preview
1. Introduction

2. Causes

3. The Consequences of the Subprime Collapse

4. Lessons from subprime crisis

5. Mitigating the effect of subprime crisis

6. Subprime crisis – India’s perspective.

1. Introduction:
The subprime mortgage crisis is an ongoing financial crisis triggered by a dramatic rise in mortgage delinquencies and foreclosures in the United States, with major adverse consequences for banks and financial markets around the globe. The crisis, which has its roots in the closing years of the 20th century, became apparent in 2007 and has exposed pervasive weaknesses in financial industry regulation and the global financial system. Many USA mortgages issued in recent years are subprime, meaning that little or no down payment was made, and that they were issued to households with low incomes and assets, and with troubled credit histories. When USA house prices began to decline in 2006-07, mortgage delinquencies soared, and securities backed with subprime mortgages, widely held by financial firms, lost most of their value. The result has been a large decline in the capital of many banks and USA government sponsored enterprises, tightening credit around the world The crisis began with the bursting of the United States housing bubble and high default rates on "subprime" and adjustable rate mortgages (ARM), beginning in approximately 2005–2006. Government policies and competitive pressures for several years prior to the crisis encouraged higher risk lending practices. Further, an increase in loan incentives such as easy initial terms and a long-term trend of rising housing prices had encouraged borrowers to assume difficult mortgages in the belief they would be able to quickly refinance at more favorable terms. However, once interest rates began to rise and housing prices started to drop moderately in 2006–2007 in many parts of the U.S., refinancing became more difficult. Defaults and foreclosure activity increased dramatically as easy initial terms expired, home prices failed to go up as anticipated, and ARM interest rates reset higher. Foreclosures accelerated in the United States in late 2006 and triggered a global financial crisis through 2007 and 2008. During 2007, nearly 1.3 million U.S. housing properties were subject to foreclosure activity, up 79% from 2006.

Financial products called mortgage-backed securities (MBS), which derive their value from mortgage payments and housing prices, had enabled financial institutions and investors around the world to invest in the U.S. housing market. Major banks and financial institutions had borrowed and invested heavily in MBS and reported losses of approximately US$435 billion as of 17 July 2008. The liquidity and solvency concerns regarding key financial institutions drove central banks to take action to provide funds to banks to encourage lending to worthy borrowers and to restore faith in the commercial paper markets, which are integral to funding business operations.

2. Causes
Causes for sharp rise in defaulted mortgages haven't started at some exact date, or at some specified event, arable ground for such a wide crisis was gradually arising during this decade mainly as the effect of loosening of lending standards and irrational rise of housing prices lately recognized as a classic example of an economic bubble. But, these aren't the sole blame bearers, every group involved in the mortgage market contributed to crisis, including borrowers, brokers, lenders, rating agencies, regulators, investors and central banks. It is arguable who carries larger part of blame and if some of them cannot be specified as main "culprits", but one thing is sure, the ones who lost the most are the homeowners evicted from home. The home prices growth in early 2000s was completely unrealistic (that's obvious now). It made homeowners believe that the prices will continue to grow and make future refinance and second mortgages quite...
tracking img