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SUBPRIME
CRISES
 Subprime Mortgage:

 By dictionary, “Subprime” is an adjective

relating to or for people with a poor credit
rating.
A poor credit rating people are disqualified
to apply for conventional mortgage or loan
application.
They come out a special type of loan to
these poor credit rating people. This loan or
mortgage is called “Subprime Mortgage” or
“Subprime Loan”.
 Why Banks Want Subprime
Mortgage?
The banks are greedy and they want to
earn more.
They earn more with the
higher mortgage interest rate and just in
case the borrowers can’t continue the
payment, they still can sell the houses
with higher value due to the property
appreciation.
To further reduce the risks the
banks repackage all mortgages into an
investment product and sell it to financial
institutions in all over the world (not just
in U.S).
 What Happened to Subprime
Borrowers?
 Expecting value of the houses to go up and they earn from the property
appreciation.
Because house prices had increased so rapidly in the past few years, paying
back the loan payment is not a problem at all.
The borrowers also refinance their loan at more favourable terms due to
they no longer have a bad credit rating history.
 When & Why Crisis Happened?
When demand is more than supply (everyone
wants to buy house), the property values went
up
 When it becomes much more expensive to
borrow, less people could afford to buy a
house.
 The real estate market begin to cool down
and house prices begin to fall.
 They’re not able to pay their existing debt,
This causes many of these borrowers to not be
able to make their house payment.
 Financial institutions were going to lose
their money that they invested because the
borrower are not able to pay the loan
payment.
 Banks have a very big problem also because
they rely on this these financial institutions to
invest in the pool of mortgages investment
product
 Bank also suffered losses from those
borrowers who failed to make payment.
 The banks increase the mortgage interest
rate to cover loses and hopes that borrowers can
pay more
Global Recession due to Crisis
The countries like Britain, Spain, Japan,
Singapore are going to bear the negative
effects of US economy recession.
Emerging economies like China and
India are also suffering from the ill effects
of the US Subprime Crisis.
All these countries together form a major
part of the global economy. So, it can be
said that the US Subprime Market Crisis is
going to affect the global economy as a
whole.
 Effects Of Crisis On India
 Indian markets will see a correction because of high oil prices, high interest rates,
slowing down of exports because of the slowing down of the US economy and
rupee appreciation. This will definitely have an impact on the GDP growth rate.
 A slowdown can be observed in:
i. automobile sector
ii. real-estate segment
iii. exports coming down
iv. textiles, jewellery
 The global super-tanker US, which has a 25 per cent share of global GDP, slows
down it will definitely have an impact on the Indian economy
 IMPACT OF CRISIS
ON GLOBAL FINANCIAL INSTITUTIONS

Company Business Type Loss (Billion $)

Citigroup Investment bank $24.1 bln

Merrill Lynch Investment bank $22.5 bln
Morgan Stanley Investment bank $10.3 bln
HSBC Bank $3.4 bln
Lehman Brothers Investment bank $2.1 bln
Goldman Sachs Investment bank $1.5 bln
JP Morgan Chase Investment bank $2.9 bln
Bank Of America Bank $5.28 bln
Credit Suisse Bank $3.7 bln
 Reduce Effect Of Crisis:
The need of the hour is to have:
i. A more open economy or be open to trade
ii. Attract investments, which would re kindle innovative concepts
and enhance foreign direct investment.
iii. The growth has to be such that it is sustainable, only then will the
impact of US subprime crisis on India and China be negligible