What Is Subprime Crises ?
Subprime crisis is the real estate crisis that engulfed the United States and then spread its tentacles to the finance industry. It was due to huge rise in mortgage defaults and foreclosures that caused problems in the banking and financial industries not just in the United States but also the world. |
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The subprime crisis became rather obvious in 2007, and has managed to reveal the weakness of the regulation system in the financial industry in the United States.
The crisis started because mortgages or rather subprime mortgages were being given to people with low credit scores and poor credit history. These mortgages were given as adjustable rate mortgages, which have a low interest rate in the first two years and thereafter the interest rate increases based on the market indices. The people who were given these mortgages were very happy in the beginning because of the low interest rate in the starting period of the loans. At the same time, values of houses also increased dramatically only start decreasing by the middle of 2006. Suddenly the borrowers who had taken subprime mortgages realized that their homes were worth a lot less and they were unable to refinance their loans. So, when the adjustable rate mortgages were set at higher interest rates, the borrowers started defaulting on their payments as they could not manage the high payments. As a result, the securities that were backed by subprime mortgages suddenly plunged in value. These securities were mostly held by financial firms. Due to all these reasons, the banks and government sponsored enterprises like Fannie Mae and Freddie Mac suddenly saw their capital falling leading to a credit crunch not just in the US, but also around the world.
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