In the US, since 2004, there is an increasing trend in
the subprime component of all the mortgages. Lending under
this segment increased by more than 200%, moving up from
9% in 2004 to 21% in 2006. By 2006, the subprime mortgages
gained prominence in the US home loan market in terms of
both volumes and also as a share of the total loan amount.
While the total volumes amounted to $600 bn, it accounted
for about 20% of the total home loan business. Analysts
felt that hidden in these increased figures was the subprime
time bomb that exploded in the open in July 2007. The immediate
impact of this subprime crisis was so acute that it rattled
large US financial houses.
When the subprime crisis burst, it not only hit the loan
customers but also the lenders. Home loan customers felt
increasingly burdened by the sharp rise in interest rates.
As a result, a series of housing loan defaults occurred.
As regards the lenders, they suffered huge losses and were
left with no option to make up their losses. Worse still
was the fact that lenders were accused of actively encouraging
the customers to state fraudulent high-income figures in
their loan applications. Most lenders, in turn, bundled
and securitized the subprime mortgages and sold them in
the credit market worldwide. A number of banks were attracted
by the high rate of interest and purchased these securities
and the derivative instruments without really assessing
the actual risks that were involved.
Significantly, the subprime crisis that began in the US
snowballed into a global financial crisis in July 2007 and
had various facets. Worldwide, stock markets registered
sharp declines, several hedge funds became worthless, retail
profits too registered declines, several mortgage lenders
turned bankrupt, and central banks were under pressure to
coordinate interventions to stem the crisis.
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