An article about the current economic crisis related to your economy in this country andor around the world?

Answer 1

The Subprime Mortgage Crisis is an ongoing economic problem that has become more apparent in 2008 and has resulted in reduced liquidity in the global credit market and also the banking & financial systems. This crisis has exposed the weakness in the global financial system and also the regulatory framework that is overlooking them.

Some of the reasons for this crisis are:

1. The US Real estate market crash

2. High default rates on Subprime loans &

3. Subprime Mortgage backed securities

A Subprime loan is a loan that is granted to a borrower who does not qualify for loans owing to a variety of risk factors like low income level, bad credit history etc.

How it all started:

In the past few years, due to high liquidity and low interest rates on mortgage loans, the demand for housing properties started increasing. After the advent of the subprime lending practices, people who were, not so creditworthy began to buy homes using these loans. This resulted in a heavy demand for houses which in turn fuelled the increase in residential property prices. The prices increased exponentially and people who already owned homes, opted for refinance at lower interest rates.

At the same time, Banks were lending mortgage loans to everyone who asked for it, considering the property price hike. On one hand, they would get their money back even if the borrower doesn't repay the loans and on the other hand the banks were selling their loan products to investment companies who packaged them into MBS and sold them in the open market. This resulted in the bank getting back almost their entire loan amount which they started lending to further subprime customers.

What went wrong?

Trying to cash in on the heavy demand for residential properties, real estate majors started promoting a huge number of residential projects. This led to overbuilding. This resulted in a surplus inventory of homes which eventually caused the real estate prices to decline by the end of 2006.

Ease of availability of loans coupled with the assumption that property prices would continue to move upwards prompted a lot of subprime borrowers to buy houses. Once the housing prices started to fall, the interest rates on loans started to rise. Most of the borrowers were unable to make their payments on time and also due to unavailability of refinance options default on loans started to increase. For most home owners, their outstanding amount on the mortgage loan was much more than the value of their houses. This motivated home owners to walk away from their property in spite of the fact that it would impact their credit ratings. People were not ready to pay hefty mortgage amounts when their property wasn't worth that much. If our home loan was worth 10 lacs and our home was worth only 6 lacs would we continue to pay our EMI on the home loan? :-)

This resulted in a surplus supply of houses which were available for Sale. The only way banks could reclaim their amount was by selling these homes. With the availability of so many homes, the prices of residential property fell further. The losses & Non Performing Asset's for banks started to increase.

The high rate of default on subprime loans & downward movement of housing prices resulted in lower demands for the MBS products created out of subprime loans. The banks & financial institutions were unable to generate the liquidity that they were expecting to which resulted in an overall credit crunch. The Banks were left with too many houses with too little buyers and similary the financial institutions had lots of MBS products with very little takers.