Presented to- Prof. Samaresh Chhotray

Presented by- Neelash Kumar Mantri

Subprime lending can be described as lending at a higher rate of interest than normal rate of interest, on loans to people with poor paying capacity.

It includes subprime mortgages, subprime car loans, & subprime credit cards.

It is also called as “Subprime Loans” which is one that is offered at an interest rate higher loans due to the increased risk.

SUBPRIME CRISIS

The crisis began with the bursting of the housing bubble in the US & high default rates on “subprime” & “adjustable rate mortgages (ARM)” made to higher-risk borrowers with lower income or lesser credit history than “prime”.

It all started in 2006 with US Market tumbling down dueto defaults by the subprime borrowers.

Increase in interest rates and simultaneously fall inproperty prices, hit the market leading to subprimemortgage crisis. Between the years 2000-2005, Lowinterest rates, high property prices.

In 2005, the property prices started falling, interest ratesstarted touching the roof top, leaving no room for thesubprime borrowers.

In 1994, less than 5% of total mortgages were subprime inUS. But within 2005, that figure went up to 20%.

However, in 2005, the rates of interest began toincrease. Therefore, demand for home came down whichalso brought down the property prices leading to start ofsubprime crisis.

Subprime Borrowers For poor credit history Limited income

Subprime Lenders Greater risks High returns

The Housing Downturn Excess supply of home inventory

Sales volume of new homes dropped

Reduced market prices (10.4% 12/06-12/07)

Borrowers Difficulties in re-financing

Begin to default on loans

Walk away from properties

Stock Market

08/15/07 Dow Jones had dropped below 13,000 from July’s 14000

First 3 weeks of 08, the Dow Jones Industrial Average fell 9%

1/18/08 Dow Jones/0.5%, S&P 500/0.6%, and NASDAQ/0.3%

01/21/08 (black Monday) the world’s biggest falls since Sept. 11, 2001

Home Owners Housing prices down 10.4% in Dec. 07 vs. year-ago Sales of new homes dropped by 26.4% in 07 vs. 06 By Jan. 2008, the inventory of unsold new homes stood at 9.8 months, the highest

level since 1981. Two million families will be evicted from their homes

Economy Condition Low GDP growth rate

Business close out or lose money (banks, builders etc.)

Weak financial market

Low consumer spending

Lose jobs

US Federal Reserve provided an emergency loan of US$85 billion toinsurance major, American International Group (AIG), which will berepaid by selling off assets of AIG

Investment bank, Merill Lynch was acquired by Bank of America inSeptember 2008 for $50 billion

US Federal Reserve granted approval to investment banks, Goldman Sachsand Morgan Stanley to convert themselves into commercial banks

US Treasury Department confirmed that both Fannie Mae and FreddieMac, would be placed into conservatorship with the government takingover their management

Wachovia Corp agrees to sell most of its assets to Citigroup Inc in a dealbrokered by regulators. However, Wells Fargo, a commercial bank, draftedan agreement to acquire assets of Wachovia for US$15.1 billion.

The deal forced Wachovia to backtrack from the Citigroup deal worthUS$2.2 billion which was backed by the US Government .

US Government releases a US$700 billion bailout package for its financialindustry.

Dow Jones posts its largest point decline ever while the S&P 500 had itsworst day since 1987 with an 8.8% drop

o Investors will be very cautious to actoLack confidence in stock/bound market

o Consumer spending will slowdownoLack of cash or unwilling to spend

o World economy may slip into recessionoU.S. economy condition will affect global economy

o GDP growth will be lowoLose businesses, Lose jobs, Economy slow down

o Financial marketoMay take long time to recover

o Unemployment rate may be highoSlow economy increase unemployment rate

o Exports will decrease in China, Korea,TaiwanoGDP growth heavily depends on export

Too many financial institutions breakdown as aresult of reckless lending.

Key policy makers ill prepared for the crisis,lacking a full understanding of the financialsystem.