Sub Prime Issue

Recent developments in the US and other western countries which is creating havoc called "SUB PRIME". How it impacts and its pros and cons please read the article.

*What is Sub prime mortgage?*

Sub prime lending, also called "B-Paper", "near-prime" or "second
chance" lending, is a general term that refers to the practice of making
loans to borrowers who do not qualify for market interest rates because
of problems with their credit history. Sub prime loans or mortgages are
risky for both creditors and debtors because of the combination of high
interest rates, bad credit history, and murky financial situations often
associated with sub prime applicants. A sub prime loan is one that is
offered at a rate higher than A-paper loans due to the increased risk.

Sub prime lending encompasses a variety of credit instruments, including
sub prime mortgages, sub prime car loans, and sub prime credit cards,
among others. Sub prime lending is typically defined by the status of
borrowers. A sub prime loan is, by definition, a loan made to someone
who could not qualify for a more favorable rate. Sub prime borrowers
typically have low credit scores and either a limited credit history, or
histories of payment delinquencies, charge-offs, or bankruptcies.
Because sub prime borrowers are considered at higher risk to default,
sub prime loans typically have less favorable terms than their
traditional counterparts. These terms may include higher interest rates,
regular fees or an up-front charge. Proponents of the sub prime lending
in the United States have championed the role it plays in extending
credit to

consumers who would otherwise not have access to the credit market. But
opponents have criticized the sub prime lending industry for predatory
practices such as targeting borrowers who did not have the resources to
meet the terms of their loans over the long term. These criticisms have
increased since 2006 in response to the growing crisis in the U.S. sub
prime mortgage industry, wherein hundreds of thousands of borrowers have
been forced to default and several major sub prime lenders have filed
for bankruptcy.

*Crises*

Beginning in late 2006, the U.S. sub prime mortgage industry entered
what many observers have begun to refer to as a meltdown. A steep rise
in the rate of sub prime mortgage foreclosures has caused more than two
dozen sub prime mortgage lenders to fail or file for bankruptcy, most
prominently New Century Financial Corporation, previously USA’s second
biggest sub prime lender. The failure of these companies has caused
stock prices in the $6.5 trillion mortgage bundled securities market to
collapse, threatening broader impacts on the U.S. housing

market and economy as a whole. The crisis is ongoing and has received
considerable attention from the U.S. media and from lawmakers.

Observers of the meltdown have cast blame widely. Some have highlighted
the predatory practices of sub prime lenders and the lack of effective
government oversight. Others have charged mortgage brokers with steering
borrowers to unaffordable loans, appraisers with inflating housing
values, and Wall Street investors with backing sub prime mortgage
securities without verifying the strength of the underlying loans.
Borrowers have also been criticized for entering into loan agreements
they could not meet. Many accounts of the crisis also highlight the role
of falling home prices since 2005. As housing prices rose from 2000 to
2005, borrowers having difficulty meeting their payments were still
building equity, thus making it easier for them to refinance or sell
their homes. But as home prices have weakened in many parts of the
country, these strategies have become less available to sub prime
borrowers. Several industry experts have suggested that the crisis may
soon worsen. Lou Ranieri, formerly of Salomon Brothers, considered the
inventor of the mortgage backed securities market in the 1970s, warned
of the future impact of mortgage defaults: "This is the leading edge of
the storm. … If you think this is bad, imagine what it's going to be
like in the middle of the crisis." There Is a possibility of five
million foreclosures that may occur over the next several years as
interest rates on sub prime mortgages issued in 2004 and 2005 reset from
the initial, lower, fixed rate to the higher, floating adjustable rate
or "Adjustable rate mortgage". Other experts have raised concerns that
the crisis may spread to the so-called Alternative-A (Alt-A) mortgage
sector, which makes loans to

borrowers with better credit than sub prime borrowers at not quite prime
rates.

Some economists, including former Federal Reserve Board chairman Alan
Greenspan, have expressed concerns that the sub prime mortgage crisis
will impact the housing industry and even the entire U.S. economy. In
such a scenario, anticipated defaults on sub prime mortgages and tighter
lending standards could combine to drive down home values, making
homeowners feel less wealthy and thus contributing to a gradual decline
in spending that weakens the economy.

* *

*Conclusion*

This is proving to be more like a LTCM (Long term Capital Management, a
Mortgage Fund that went bust like the present Bears Funds), a recession
in the US cannot be ruled out and if there is a recession in US entire
world economy would be depressed. India is not completely dependent on
the US and the internal demand is enough to fuel the growth in India for
at least for next 10 years. This crisis may present us a very good
buying opportunity.