This document provides an overview of the 2008 subprime mortgage crisis in the United States. It defines subprime loans as high-risk loans given to borrowers with poor credit. In the early 2000s, low interest rates and rising home prices fueled increased subprime lending. However, starting in 2006, subprime borrowers began defaulting on mortgages as home prices declined. These mortgage defaults led to losses in mortgage-backed securities, hurting financial institutions and triggering a global recession. India was less impacted than other countries due to regulations that limited exposure of its financial system to global markets.

1. PRESENTED BY
SAMIR
SHEKHAR
SUBPRIME CRISIS 2008
Housing Bubble: USA

2. MEANING OF SUBPRIME :
• The word means subordinate to primary
• It is the loan given to people with a bad credit rating
who are not eligible for Prime loan ( normal loans )
• Characterized by higher interest rates, poor quality
collateral, and less favorable terms in order to
compensate for higher credit risk
• Sub-prime lending may be utilized for sub-prime
mortgages, sub-prime car loans, sub-prime credit cards
etc.
MEANING-

3. Why are Subprime loans issued ?
• For banks to earn more money by tapping the defaulting
customers
• For young people who do not have enough money for
down payment
• For people having financial problems
• For people who are discriminated
REASONS -

4. • The US subprime mortgage crisis was a set of events and conditions that led to a financial
crisis and subsequent recession that began in 2008
• Characterized by a rise in the inability to pay housing mortgages resulting in the decline of
securities backed by mortgages
• These mortgage-backed securities (MBS) initially offered attractive rates of return
• However, the lower credit quality ultimately caused massive defaults
• The money was sucked out of several banks, financial institutions and the economy as a
whole in September 2008
• Several European and developing countries had invested heavily in American banks
• The subsequent loss of funds resulted in the Global Recession of 2008
Subprime Crisis in Brief

5. • 2000-2005 :
 Very low interest rates, property prices were on a rising
trend and the sub prime borrowers were able to meet
their obligations by selling the properties or getting the
properties refinanced
 This created what is called ‘The Housing Bubble’
HOUSING BUBBLE

6. • 2006-2008 :
 More subprime borrowers failed to pay their debts
 Securities held by mortgages lost value globally
 Global investors also drastically reduced purchases of
mortgage-backed debt and other securities
PROCEEDINGS

7. WHEN DID IT ALL
START?

8. • Owning a home is part of the 'American Dream'. It allows
people to take pride in a property and engage in a
community for the long term.
• However, homes are expensive and most people need to
borrow money to get one.
• The conditions were right for people to achieve that
dream. In the early 2000s, mortgage interest rates were
low, which allow you to borrow more money with a lower
monthly payment. In addition, home prices increased
dramatically, so buying a home seemed like a sure bet.
• Lenders understood that homes make good collateral so
they were willing to participate.
• The mortgage crisis was triggered as this situation built
momentum.
The American Dream

9.  DOT COM COLLAPSE – 2000
 SEPTEMBER 11 TERRORIST ATTACK

10. • Low interest rates
• Increase in loan incentives
• Easy credit conditions

11. •Principle of demand and Supply
2001 2004

12.  When house prices ceased rising in mid 2006
and then started falling, subprime mortgage
defaults began accelerating.
 Effects
• Sub prime borrowers
• Financial institutions
• Banks
2006

13. • On December 1, 2008, the National Bureau of
Economic Research announced that the economy
had entered into a recession in December of 2007.
Real GDP increased by only 0.4 percent for the year
2008, and it decreased at annual rates of 5.4
percent in the 4th quarter of 2008 and 6.4 percent in
the 1st quarter of 2009. The unemployment rate
increased from 4.9 percent in December of 2007 to
9.5 percent in June of 2009.
• The total real estate equity in The United States was
valued at $13 trillion during the 2006 peak, had
fallen to $8.8 trillion by mid 2008.
2008

14. FALL DOWN

15. The Main
Players
The people who
contributed to the deadly
chain of events that sent
the entire world economy
into recession.

16. • Continued Reduction
in Fed Rates
• Sudden increase in
Money supply
• Rates remained low
till 2005
• High Liquidity
The Federal Reserve

17. • Lowered to lending rates to increase loan off
take
• As the prime market was nearing saturation,
began lending to subprime borrowers
• Aggressively sold MBS, CDO
• Additional funds raised by securitization was re-
deployed in the same manner
Commercial Banks

18. • Non-traditional mortgages
• MBS ratings influenced using parental linkages
as well as rating shopping

19. • Increased use of Secondary mortgage market
• Lenders sold their mortgages in the secondary
market
• Pooled mortgages into securities like CDOs and
MBS
Investment Banks

20. Investors:
• Investors were the ones willing to purchase
these CDOs at ridiculously low premiums over
Treasury bonds.
• These enticingly low rates are what ultimately
led to such huge demand for subprime loans.
INVESTORS-

21. Source: Hammond Associates

22. • Fuelled volatility through credit arbitrage
• Credit Default Swaps
• Influenced banks to bring out more MBS &
CDOs as it was a good avenue to invest in
Hedge Funds

23. The worst hit economies
Source: Wikipedia
Denotes the real GDP Growth during 2009.
(Countries in brown represent those in recession)

24. SUBPRIME CRISIS
AND INDIA

25. Impacts of the US Financial Crisis
on India
The US meltdown which shook the world had little
impact on India, because of India’s strong
fundamental and less exposure of Indian
financial sector with the global financial market.
Perhaps this has saved Indian economy from
being swayed over instantly. Unlike in US
where capitalism rules, in India, market is
closely regulated by the government.

26. India’s GDP growth rate
Year Growth Rate
2005-06 9.5
2006-07 9.6
2007-08 9.3
2008-09 6.8
2009-10 8.0
2010-11 8.6
Source: http://planningcommission.nic.in/data/datatable/1705/final_1.pdf

27. Year Growth (US$ Bn)
2006-07 22.6
2007-08 29.0
2008-09 13.7
2009-10 -3.6
2010-11 29.5
India’s export growth rate
 15 per cent of total export in 2006-07 was directed toward USA.
 Official statistics released on the first day of the New Year, showed that
exports had dropped to $1.5 billion in November 2008, (Sivaraman,
2008) from $12.7 billion a year ago.
 Manufacturing sectors like leather, textile, gems and jewellery got hit
hard.

29. Impact on Indian Stock Market

30. BSE ‘SENSEX’ PERFORMANCE IN 2008
Month Open High Low Close
January 20325.27 21,206.77 15,332.42 17468.71
February 17820.67 18,895.34 16,457.74 17578.72
March 17227.56 17,227.56 14,677.24 15644.44
April 15771.72 17,480.74 15,297.96 17287.31
May 17560.15 17,735.70 16,196.02 16415.57
June 16591.46 16,632.72 13,405.54 13461.60
July 13480.02 15,130.09 12,514.02 14355.75
August 14064.26 15,579.78 14,002.43 14564.53
September 14412.99 15,107.01 12,153.55 12860.43
October 13006.72 13,203.86 7,697.39 9788.06
November 10209.37 10,945.41 8,316.39 9092.72
December 9162.94 10,188.54 8,467.43 9647.31
Source: http://www.bseindia.com/indices/indexarchivedata.aspx

31. Impact on India’s trade
Impact on India’s handloom
sector, jewellery export and
tourism
Exchange rate depreciation
Information technology-BPO
sector
Foreign institutional investors
and FDI

32. This crisis also shows the failure of capitalist
market economy while the Indian economy
would be able to withstand the crisis without
any major difficulty

33. Why sub prime is not a
crisis in India ??

34. Role of Black Money
Lending based on ‘calls’
large portion of organised
lending is with public sector
banks

35. • He started sensing that real
estate, in particular, had entered
bubble territory before the crisis.
• One of the first moves he made
was to ban the use of bank loans
for the purchase of raw land.
• Only when the developer was
about to commence building
could the bank get involved —
and then only to make
construction loans.
ONE MAN ARMY of Dr. Y.V. Reddy!

36. • Reddy pushed interest rates up to more than 20
percent, which of course dampened the housing
frenzy.
• He made banks put aside extra capital for every
loan they made.
• In effect, Mr. Reddy was creating liquidity even
before there was a global liquidity crisis.

37. BANKS PERFORMANCE

39. THANK YOU