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Submitted by-Mayank Gupta(12228) Tushar Barech(122 ) Chinmay kothe(12216) Shalini Patro(1224 ) Pooja Singh(122
What is sub-prime
Sub-prime actually refers to the credit status of borrowers. Credit score less than ideal. Any loan that does not meat with prime guidelines.
Sub-prime lending is risky for both lenders and borrowers due to 1. High interest rate 2. Poor credit history 3. Adverse financial situation Sub prime loan is offered at a rate higher than normal loan rate.
In 2004 sub prime lending rate reached to 21%. Investors appetite for mortgage backed security. To high risk borrowers , high risk loan options and incentives. Btw 1997 and 2006 ,house prices increased by 124%. Appreciation of prices ,encouraged the sub prime borrowers. Resulting them borrowing more at ARM. And then.......
bomb exploded..
Housing prices depreciated in many part of US. Refinancing have become difficult. Leaving home-owners with higher payments then anticipated. Steep rise in the sub prime mortgage. Caused more than 100 sub-prime lenders to fail or file for bankrupcy. USAs second biggest subprime lender , New Century Financial Corporation failed. Failure of these companies caused collapsing of $6.5 trillion MBS(mortgage backed security).
Home equity valued valued at $13 trillion at its peak in 2006, had dropped to $8.8 trillion by mid-2008 . savings and investment assets lost $1.2 trillion and pension assets lost $1.3 trillion. More and more financial firms either merged. the CEOs of Merrill Lynch and Citigroup resigned within a week of each in late 2007. Traders across the world traded in these companies faces huge losses. Big investors in these companies downgraded their balance-sheet.
Losses in these companies causes loss in goodwill and loss of shareholders. Ultimately hitting on the USAs , Europe and Asian markets hedge fund companies ,banks ,traders. Invested in subprime mortgage industry found their investment near valueless. Money market subject to a bank run. Interbank lending, quadrupled shortly after the Lehman failure
As a result..
Right now there is liquidity crisis on wall Street. Because so many sub prime loans are in default. Wall street investor are no longer supplying money to market who used to lend ahead. Policies have become tight. Sub-prime borrowers are no longer able to refinance their loans. Now they take short term adjustable loans ,which are for 2-3 years with high interest rates. Unexpected UK market also got affected.
In 2011, 872,000 previously foreclosed homes in the hands of banks. Lowered the target for the Federal fund rate from 5.25% to 2%, and the discount rate from 5.75% to 2.25%. Central banks have also lowered the interest rates. Several major financial institutions either failed, were bailed-out by governments. During the last quarter of 2008,the federal reserv bank ,European central bank and other central banks purchased US$2.5 trillion of government debt . The governments of European nations and the USA also raised the capital of their national banking systems by $1.5 trillion.