The US subprime lending market crisis continues to rattle the global financial markets like a distant tornado that seems to grow in momentum by the week for Dalal Street, even as players make a valiant attempt to shrug off the fear by looking at the positives at home. This article discusses the relevant issues and the impact on various other markets.

The recent wave of defaults in the subprime mortgage sector sent shocks through the entire global stock market. The epicenter of this tremor was the US, but its ripples were felt all over the world. More than two million homes financed by subprime lenders are expected to face foreclosure this year and nearly 17% of subprime mortgages issued so far are projected to fail, according to a study by the Center for Responsible Lending, a non-partisan research and policy organization. Foreclosures in the subprime mortgage market are expected to cost American homes as much as $200 bn.

Let us first understand what subprime mortgage is before we take a look at the crisis. When banks lend money to people, they broadly classify them into prime and subprime debtors. Prime debtors are the ones who are considered creditworthy. Subprime debtors are the ones with impaired or no credit history. Subprime lending can be defined simply as lending that involves higher credit risk. While prime loans are typically made to borrowers who have a strong credit history and can demonstrate a capacity to repay their loans, subprime loans are typically made to borrowers who are perceived as deficient on either or both of these grounds. Since this involves risk of non-payment by the client, it is usually offered at a higher interest rate.

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