Ye Subprime lending kya hai ??

Recently, We have Observed a melt down in US mortgage Market, due to sub prime mortgage, leading to global concern over slow down of US economy, and corresponding impact on the global stock market. We try to understand what is sub-prime lending and how is it impacted US economy.

What is Sub prime lending ?

• Sub prime lending refers to the practice of making loans to borrowers who do not qualify for normal interest rates because of problems of their credit history


• Sub prime loan is offered at higher rate due to increased risk


• Sub prime lending encompasses of variety of instruments, including sub prime mortgages, sub prime car loans, and sub prime credit cards, among others


• Sub prime mortgages have a much higher rate of default than prime mortgage loans

US Sub prime mortgage crisis

Beginning in 2006, US sub prime mortgage industry entered what many observers have begun to refer as a meltdown. A steep rise in the rate of sub prime mortgage foreclosures has caused more than two dozen sub prime loan mortgage lenders, which includes home lender giants like New Century Financial Corporation, Ameriquest mortgage and HSBC Holding Plc to fail or file for bankruptcy. The failure of these companies has caused stock prices in the $ 6.5 trillion mortgage bundled security market to collapse, threatening broader impacts on the US housing market economy as a whole. The crisis is ongoing and has received considerable attention from the US media in early part of 2007

As housing prices rose from 2000 to 2005, borrowers having difficulty in meeting their payments were still building equity, thus making it easier for them to refinance or sell their homes. But home prices weaken; these strategies have become less available to sub prime borrowers.

Some experts concerns that the sub prime mortgage crisis will impact the housing industry and entire US economy. In such scenario anticipated default on sub prime mortgages and tighter lending standard could combine to drive down home vales, making homeowners feel less wealthy and thus contributing gradual decline in spending that weakens the economy. Other economist doubt home prices will fall dramatically because most owners won’t have to sell, but still predicts home value will remain flat or slightly depressed for three or four years.

As the crisis have unfolded and prediction about it strengthening, some democratic lawmakers suggested that US government should offer funding to troubled borrowers avoid loosing their homes. Some economist criticized the proposed suggestion, saying it could have more defaults or encouraging more risk lending.

The crisis has resulted melting down prices of many home lending companies in US and ultimately affects stock markets all over the world.