1) Between 1995-2006, strong economic growth fueled demand for homes, leading banks to aggressively offer subprime mortgages to borrowers with poor credit. 2) Starting in late 2006, defaults increased as interest rates rose and housing prices fell. Major financial institutions suffered huge losses on mortgage-backed securities tied to subprime loans. 3) By 2007, the crisis led to a broader credit crunch and global recession as banks wrote off bad loans and many financial firms collapsed.

1. Collapsed (Individuals + Corporate + Banks) = Collapsed System Sub-Prime Crisis An Economic Perspective PaisaMatters.com

2. The days of high levels of employment and high disposable income in the hands of individuals saw 1995 – 2006: The Bright and Sunny Days… High demand for commodities and goods Source: www.bloomberg.com PaisaMatters.com

3. 1995 – 2006: The Bright and Sunny Days… Increasing demand led to increased production levels Jobs creation and an all around industrial and economic growth PaisaMatters.com

4. 1995 – 2006: The Bright and Sunny Days… Source: www.ofm.wa.gov PaisaMatters.com

5. Source: epress.anu.edu.au 1995 – 2006: The Bright and Sunny Days…

6. 1995 – 2006: The Bright and Sunny Days… The consumer generated organic infusion of money generated strong liquidity in the economy The increasing aspirations and risk taking ability coupled with low interest rates fuelled strong credit growth Banking system flushed with liquidity felt a need to accelerate the credit growth PaisaMatters.com

7. High income levels and desire to own a dream home had already created a good mortgage loan portfolio 1995 – 2006: The Bright and Sunny Days… Low interest rates made the housing more affordable and allowed to borrow more The prime mortgage loan market was falling short of propelling the desired exponential credit growth There was a huge population with ‘ less than perfect credit ’ to be tapped PaisaMatters.com

8. Borrowers with less than perfect credit - the Subprime borrowers, presented a mouthwatering opportunity for bankers in the mortgages market 1995 – 2006: The Bright and Sunny Days… Banks started chasing the subprime borrowers with easy loans People who otherwise could not have afforded a home, bought homes with the high interest rate loans PaisaMatters.com

9. 1995 – 2006: The Bright and Sunny Days… Welcome to the world of Sub-Prime Mortgages PaisaMatters.com

10. 1995 – 2006: The Bright and Sunny Days… Subprime loans are mortgages given to borrowers with ‘ less than perfect ’ credit or poor credit history Most subprime borrowers are ones with low and inconsistent income Because subprime loans are riskier, they carry a higher rate of interest Not all subprime mortgage loans were used for buying houses but to refinance other obligations like credit card debts, making them even more risky PaisaMatters.com

11. 1995 – 2006: The Bright and Sunny Days… Borrowers were happy to get loans without worrying about credit worthiness Mortgage brokers were happy as they were paid to underwrite these easy selling subprime loans without a responsibility to recover Bankers were happy with the credit growth and higher returns from subprime loans A Win-Win for all, but not for long. PaisaMatters.com

12. 1995 – 2006: The Bright and Sunny Days… PaisaMatters.com

13. 1995 – 2006: The Bright and Sunny Days… The bankers who originated subprime loans converted them to bundles of securities and sold the packaged Mortgage Backed Securities (MBS) in financial markets This allowed banks to pass on the risk of default to investors of MBS This allowed banks to get these loans off their balance sheet and borrow more, only to originate more subprime loans The buyers of these subprime MBS thought they were taking a calculated risk of default in lieu of higher returns PaisaMatters.com

14. 1995 – 2006: The Bright and Sunny Days… In the “High Risk – High Reward” equation, the involved risks were grossly overlooked for the lucrative rewards PaisaMatters.com

15. 1995 – 2006: The Bright and Sunny Days… Low interest rates + Rising property prices + Banks chasing after borrowers with easy loan offers Result Swollen sub-prime mortgage portfolio & huge debt ridden population Source: i.ehow.com Source: Flickr.com PaisaMatters.com

16. 1995 – 2006: The Bright and Sunny Days… PaisaMatters.com

17. Q4 2006 – Q2 2007: The Gloomy Evenings Too much money chasing too few goods resulted in increase in commodity prices and rising inflation rate The interest rates started moving northwards Because most of these loans were Adjustable Rate Mortgages (ARMs), the loan installment amount increased Pressure started to mount on borrowers monthly cash outflows to meet the fixed obligations PaisaMatters.com

18. Q4 2006 – Q2 2007: The Gloomy Evenings.. Falling demand for properties led to a rapid decrease in property prices PaisaMatters.com

19. Q4 2006 – Q2 2007: The Gloomy Evenings.. Rising oil prices and falling stock markets saw an erosion of investments Decreasing demand all around resulted in reduced production levels and job losses Economic slowdown was slowly making an entry PaisaMatters.com

20. Q3 2007 Onwards: The Scary Nights… The subprime borrowers with inconsistent and low incomes could not pay the increased loan installments Banks started to tighten the credit norms preventing subprime borrowers to refinance existing debts to lower payments Borrowers could not sell the property to repay debts as the house was worth less that what they bought for This left borrowers with an option to bring in more money or miss the loan payments PaisaMatters.com

21. Q3 2007 Onwards: The Scary Nights… Improving cash flows was a distant possibility for sub-prime borrowers, missing payments was obvious The sub-prime loan defaults started mounting With a further continuous increase in interest rates, it became almost impossible for borrowers to repay the increased mortgage bills Loan foreclosures started increasing PaisaMatters.com

22. Q3 2007 Onwards: The Scary Nights… PaisaMatters.com

23. Q3 2007 Onwards: The Scary Nights… Because there were not many buyers for foreclosed properties, banks could not recover their outstanding loans by selling the foreclosed properties With tightened credit norms, fewer borrowers qualified for new loans leading to more homes to sell to fewer buyers Banks left with no other option but to write off the outstanding defaulted loans Once considered cash cows, the high return fetching mortgage backed securities (MBS) became worthless PaisaMatters.com

24. Q3 2007 Onwards: The Scary Nights… In deteriorating economic conditions, sub-prime loan defaults were followed by defaults in prime mortgages home equity loans unsecured consumer loans (car loans, student loans, credit cards) and commercial loans PaisaMatters.com

25. PaisaMatters.com Q3 2007 Onwards: The Scary Nights…

26. Q3 2007 Onwards: The Scary Nights… Tons of outstanding credit with no recovery in sight saw financial institutions broke This caused more than two dozen lenders to close, sell themselves to larger firms or report unprecedented losses Once massive, some financial institutions filed for bankruptcy Source: nancarrow-webdesk.com PaisaMatters.com

27. Q3 2007 Onwards: The Scary Nights… The panic started to spread Stock markets crashed Lost confidence in financial system Wall street pillars started crumbling USA is witnessing one of the largest systemic collapse in its history Source: newsimg.bbc.co.uk PaisaMatters.com

28. Q3 2007 Onwards: The Scary Nights… Financial Times – 20 September 2008 “… bank boards and bank executives have failed to understand complex mortgage-backed banking products, as have central bankers, regulators and credit rating agencies.” PaisaMatters.com

29. ?: The Dawn Ahead… Costly though, surely, a lesson for the economy Is the worst over yet? … Probably not ! How long before the economy starts looking-up again? … Nobody knows! Hopefully Sooner, is the Dawn Ahead… PaisaMatters.com