Wednesday, September 24th, 2008
- The term “subprime” refers to the credit status of the borrower (being less than ideal), not the interest rate on the loan itself.
- Technically, the people whose credit score is below 620 is known as Subprime.
- The US Sub-prime Crisis can also be referred as Credit-derivatives led crises.
- The US Sub Prime crisis involves lending loans to the borrower who has poor credit worthiness. As the creditability of the borrower is not sound, therefore the risk involves in the deal is very high and thus the Interest rates charged by the lender would also be high.
- The loans were made to the borrower based on the “Stated Income” and in fact without verification of any proof for the same.
Many people Call it as a LIAR Loan… or loan made to a borrower of NINA (No Income No Asset) Category and NINJA (No Income No Job also) Category.
- Around $ 400- $ 500 Billion were made up of these sub-prime loans.
- These Sub prime borrowers take these loans and buy a house and sell it to make some money. But, when the House prices crashed and interest rates rose, then these borrowers started defaulting as they were unable to refinance and had no option but to default on their loans.
- As the borrowers started defaulting, the bad debts of the Banks started cropping up. The Bad debts of HSBC Bank rose to $6.8 Billion. New Century Financial, America’s 2nd biggest sub-prime lender carries 23 Billion USD in debt and had adversely affected the liquidity of the banks. Due to this liquidity crisis, Century Financial became bankrupt.
Tags: Financial meltdown, Sub Prime Crises, Subprime Crises, What is sub prime crisis
Posted in Finance | No Comments »