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SUB-PRIME CRISES

Rahul (CA Practice ) (1818 Points)

22 January 2008

DEAR FRIENDS NOW A DAYS WE R HEARING A VERY COMMON TERM ON ALL BUSINESS NEWS CHANNELS " SUB PRIME CRISES"

WHAT EXACTLY IS SUB PRIME CRISES CAN ANY ONE EXPLAIN

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7 Replies

CA. Amit Daga (Finance Controller CA. CS. CFA. CIFRS. M.COM. ) (9017 Points)
Replied 22 January 2008

Hi Rahul Sub-prime lending usually refers to the practice of giving loans to those who do not qualify for regular loans at market interest rates because of their poor credit history. Due to the increased risk associated with the takers, sub-prime loans are offered at a rate higher than market rates. These loans are risky for both, those who are giving and those who are taking, because these combine high interest rates, bad credit history, and often, murky financial situations of the takers. The current sub-prime mortgage meltdown in US refers to the rash of sub-prime housing loan defaults that began in late 2006 and has continued into 2007. The sharp rise in foreclosures has caused several major sub-prime mortgage lenders to shut down or file for bankruptcy, leading to the collapse of stock prices for many in the subprime mortgage industry. About 21% of all mortgages between 2004 and 2006 were sub-prime, up from 9% during the previous eight years. By 2006, sub-prime mortgages totalled $600 billion, accounting for about 20% of US home loan market. This kind of crisis is known as subprime crisis

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Amit Khandelia (Analyst) (125 Points)
Replied 22 January 2008

Very aptly explained by Amit! Just to add on. In order to lure the customer, in the beginning they are offered low rates (lower than the market rate). After a certain period, the rates are reset to equal the vale of index at that particular time. Due to these sudden pressure lots of investor starts defaulting...

CA Soumya Anurag (Job Hunt) (45 Points)
Replied 04 October 2008

hii rahul,

as aptly said above, the main reason of sub prime crises is extending loans to persons, who are otherwise not eligible for lending at normal rates.

further, just because the borrower does not hav fair creditibility, they are charged at more than normal rates. The loans are extended by mortgaging pproperty with an assumption that the properties wil fetch a good return in near future.

But takin present scenarion into consideration, the property prices hit rock bottom thus not fulfillin the lending terms and conditions

soumya (Article) (40 Points)
Replied 04 October 2008

Originally posted by :Guest
"	hii rahul, as aptly said above, the main reason of sub prime crises is extending loans to persons, who are otherwise not eligible for lending at normal rates. further, just because the borrower does not hav fair creditibility, they are charged at more than normal rates. The loans are extended by mortgaging pproperty with an assumption that the properties wil fetch a good return in near future. But takin present scenarion into consideration, the property prices hit rock bottom thus not fulfillin the lending terms and conditions	"

(Guest)

Subprime crisis has its roots in 2001 when US economy under went recession owing to the IT sector, which resulting in the cut down of lending rates to commercial banks by federal reserve, to 1%, to increase production in the country, banks started giving loans(housing loans), at subprime rate( where credit worthiness of the borrowers is boubtful and the interest rate is very high) and the mortgage was the property which was to be made out of the loan(primary security), at a very cheap rate, gradually the country came out of recession and Fed Reserve increased the lending rate, interest rate of the banks increased and subsequently the value of houses came down, and on credit defoault the banks could not recover the loan, banks in US then converted the bad debts into shares, the process is known as securitization, and floated the shares in the market, many financial institutions like Lehman Brothers, AIG bought the shares and when they could not recover the money they collapsed.