Impact of Sub-Prime Crisis on India

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Date Submitted: 11/27/2011 09:23 PM

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Introduction to Subprime Crisis The term ‘subprime’ and a little background to the crisis Subprime credit refers to extension of credit facilities to borrowers who have deficient credit history or inadequate documentation. The interest rate applicable in the subprime market is higher because of the higher risk involved in lending to people who do not show adequate creditworthiness. The subprime mortgage market had expanded rapidly in recent years. A decade ago, five percent of mortgage loan were subprime; by 2005 the figure had jumped to approximately 20 percent.

The reason for such expansion of subprime credit was excessive credit. Post 2000, in the aftermath of the dot com bust and the impending recessionary tendencies in the US economy, the Fed had cut interest rates to as low as 1.5 per cent in June 2003, their lowest levels since 1958. Credit was cheaply available and it was scouting for asset markets in which to exhaust itself. It was no surprise that the outlet for deployment of credit came in form of the housing market as home prices had begun to show an uptrend after having bottomed out. The story from the side of the subprime borrowers Owning a house became very easy due to low interest rates and rising home prices. In early 2003, the rate on a 30-year fixed-rate mortgage was at the lowest levels seen in nearly 40 years. Home loans were being disbursed at a hurried pace as borrowers did not want to miss out on making a fortune for themselves on the back of rising real estate prices. The rationale for taking out a mortgage loan was that with home prices in a secular uptrend, in a few years itself, the market value of a mortgaged...