Sub Prime Mortgage

SUB-PRIME MORTGAGE

WHAT IS SUB-PRIME? Sub-prime lending is the practice of making loans to

borrowers who do not qualify for market interest rates owing to various risk factors such as Income level Size of the down payment made Credit history Employment status

CAUSES OF THE CRISIS ROLE OF BORROWERS:

Loan incentives such as easy initial terms together with rising house prices encouraged borrowers to assume difficult mortgages on the belief that they would be able to relieve at more favourable terms. HOUSING DOWNTURN: Over building of houses in the boom period increased the supply of homes available, therefore the prices declined aand the risk of default increased.

SECURITIZATION:

A financial process in which assets and receivables are acquired and then sold to a third party. The rating agencies gave investment grade rating to securitization transactions which gave credibility to sell the debt to investors mainly investment banks.

EFFECTS 100 mortgage companies have closed down or been

sold since 2007.

Bank of china stated $9.7 billion loss on its

investment in US sub-prime debt.

ICICI reported $236 million loss on its investments

CEO’s of Citibank and MerrilLynch were forced to

resign as both the banks reported record losses.

Rescue merger of Merril Lynch by BANK OF

AMERICA.

Bankruptcy of Lehmann brothers.

$ 85 billion rescue loan for AIG by the federal reserve. Sharp drops in stock markets throughout the world Reduced lending activity by the banks

Oil prices tumbled to about $90 a barrel due to fears

of a recession in the American economy.