Assignment on American mortgage crisis

Subject : Financial management Prepared by: Neha bhayani (Roll no.03) Submitted to: pro. utkarsh trivedi Shree sahajanand institute of management

AMERICAN MORTGAGE CRISIS

Mortgage: In simple terms, it is a conditional conveyance of property as security for the repayment of a loan. Sub-prime Mortgage: It means offering loans to borrowers who do not qualify for them at market interest rates due to their deficient or poor credit history. Since this involves risk of non-payment by the client, it is usually offered at a higher interest rate. Sub-prime lending may be utilized for sub-prime mortgages (few home loans), sub-prime car loans, subprime credit cards etc. Subprime mortgages totaled $600 billion in 2006, accounting for about one-fifth of the US home loan market. Some of the subprime mortgages include: Interest-only mortgages, which allow borrowers to pay only interest for a period of time pick a payment loans, for which borrowers choose their monthly payment initial fixed rate mortgages that can be converted to variable rates Potential sub-prime borrowers may comprise of financially troubled people i.e. those who lost jobs, those with a history of previous debts, those who have had marital problems or those who had unexpected medical conditions. Sub-prime lenders take a higher degree of risk; by increasing the interest rates they manage to offset the risk to an extent.

SUB-PRIME MORTGAGE CRISIS IN US:

The US real estate industry had a boom between 2001 and 2005 as property prices reached historic highs on account of low interest rates, price-to-rent ratios and other factors. When property prices began to fall due to saturation or lack of demand, the owners had to face mortgage loan which was higher compared to property value. The collapse of the US market had a direct impact on housing values, mortgage industry, real estate companies, hedge funds etc. (A hedge fund is an investment fund charging a performance fee and typically open to only a limited range of investors; unlike mutual funds and pension funds, hedge funds are not usually regulated by Securities Exchange Commission.) In late 2006, several US sub-prime mortgage companies had to close down due to losses. New Century Financial Corporation had to file for bankruptcy. Some companies were accused for actively encouraging fraudulent income inflation on loan applications. This led to collapse of stock prices for many companies in subprime mortgage industry, notably for some large lenders like Countrywide Financial and Washington Mutual.

Sensex Chart of year 2006

16,000.00 14,000.00 12,000.00 10,000.00 8,000.00 6,000.00 4,000.00 2,000.00 0.00 2/1/2006 23/01/06 14/02/06 6/3/2006 27/03/06 19/04/06 9/5/2006 29/05/06 16/06/06 5/7/2006 25/07/06 14/08/06 4/9/2006 22/09/06 13/10/06 3/11/2006 23/11/06 13/12/06 Series1 Series2 Series3 Series4

Sub-prime mortgage crisis in US in 2006(June)

Sensex Chart of June 2006

12,000.00 10,000.00 8,000.00 6,000.00 4,000.00 2,000.00 0.00 Series1 Series2 Series3 Series4

Sub-prime mortgage crisis in US in 2006(June)