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Housing Bubble in sub-prime crisis

Starting from the late 90′s, American households have been spending more than their disposable personal income on consumption or interest payments on account of low interest rates, foreign investments in a booming market and rising housing prices (approx 124% between 1997 and 2006) which added to their confidence in the economic indicators. The sub-prime lending added [...]

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Real Estate Speculation in sub-prime crisis

by R. Venkata Subramani

Another contributing factor is speculation in residential real estates. During housing boom, homes were increasingly bought with an intention of investment instead of primary residences. This resulted in homes being purchased while under construction, and then sold for a profit without the seller having resided in them. Many investors also assumed highly leveraged positions in [...]

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Sub-prime mortgages

by R. Venkata Subramani

These are loans provided at sub-prime rates against mortgage of property. Apart from the availability of sub-prime rates in-spite of not having eligible credit ratings, another incentive that drove these mortgages was that the US Tax Code had provisions to allow 100% tax deductibility of all interest payments and part of principal payments on housing [...]

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Sub-prime Lenders & Borrowers

by R. Venkata Subramani

Sub-prime Lenders In order to tap the increasing sub-prime market, lenders took on a lot of risk accompanied with poor credit ratings. To offset the risks, lenders demanded a higher interest rate or other credit enhancements to compensate the increased costs associated with collection from such borrowers, as well as the probable default rate. Sub-prime [...]

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Background of sub-prime lending

by R. Venkata Subramani

Sub-prime lending was a result of the increasing demand in the marketplace for loans to less-than-ideal customers, meaning, those with imperfect credit and who are therefore unable to avail funding through normal sources. This induced many companies to enter the market taking advantage of low prime interest rates and the resultant negative real interest rates thereby [...]

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Meaning of sub-prime

by R. Venkata Subramani

Sub-prime lending extends credit to people who do not have access to the regular credit market. It could take the following forms: Loans to borrowers who have an existing history of loan delinquency or default Loans to borrowers already bankrupt Loans that do not meet guidelines stipulated by Fannie Mae or Freddie Mac Loans based [...]

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Sub-prime mortgage loans – Seed to the crisis

by R. Venkata Subramani

More and more loans were given to higher-risk borrowers to benefit out of the booming market. The spread between prime and sub-prime mortgage interest rates came down drastically from 2.8% in 2001 to 1.3% in 2007 to induce the borrower thereby compensating on the risk premium. The risk premium was compensated in-spite of the decline [...]

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Background of sub-prime

by R. Venkata Subramani

Sub-prime mortgages formed a major portion of the overall mortgage market being estimated at $1.3 trillion as of March 2007. These mortgages had little or no upfront payment was made and issued to low/minority income/assets groups with low credit profiles. In third quarter of 2007, sub-prime ARM’s amounting to 7% of overall mortgages outstanding in [...]

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Meaning of sub-prime mortgage crisis

The term “Sub-prime Mortgage Crisis” refers to the current financial crisis which was primarily triggered by increasing delinquencies and foreclosures in mortgage loans in US and hence affecting major banks and financial markets around the globe adversely. The last time the world faced such a situation was after the stock market crash in October 1929. It took three [...]

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