SUBPRIME LENDING
INTRODUCTION:
Sub-prime lending usually refers to the practice of giving loans to those who do not qualify for regular loans at market interest rates because of their poor credit history. Due to the increased risk associated with the takers, sub-prime loans are offered at a rate higher than market rates.
These loans are risky for both, those who are giving and those who are taking, because these combine high interest rates, bad credit history, and often, murky financial situations of the takers.
Subprime lenders use a risk-based pricing system to calculate the terms of loans, including the interest rate, which they offer to borrowers with varying credit histories. The securities issued by subprime lenders tend to carry more credit risk but less interest rate risk than securities backed by prime loans. This is because subprime borrowers tend to have a shorter time horizon and fewer opportunities to refinance when interest rates fall.

SUB PRIME CRISIS:
The subprime mortgage crisis, popularly known as the “mortgage mess” or “mortgage meltdown,” came to the public’s attention when a steep rise in home foreclosures in 2006 spiraled seemingly out of control in 2007, triggering a national financial crisis of USA that went global within the year. Consumer spending was down, the housing market had plummeted, foreclosure numbers continue to rise and the stock market had been shaken. The subprime crisis and resulting foreclosure fallout has caused dissension among consumers, lenders and legislators and spawned furious debate over the causes and possible fixes of the
“mess.”

START OF SUBPRIME CRISIS:

The subprime lending was 9% in 1996 but in 2004 it reached to21%. Due to securitization, investor appetite for mortgage-backed securities (MBS), and the tendency of rating agencies to assign investment-grade ratings to MBS, loans with a