SUBPRIME LENDING ....A BANE FOR US BANKS

"We sow bad loans in good times " a old proverb now seen in light with the subprime lending problems in US .
Subprime lending is done to customers who dont have any prior credit worthy history with tha bank , this state of lending is called predatory lending , in the late 90s US economy saw a growth in real estate and a boom in the sector which lead to banks giving loans to people who were not credit worthy at low interest rates . As US has a ARM system , that is adjustable rate mortgage system , which changes with fluctuations in the economy , this was pegged in the form of 2/28 i.e for 2 yrs a market rate of 1.1% was fixed as interest and after 2 years a increased interest rate i.e (1.1% + 300basis points) for a period of 28 years but in 2005 this changed to 3.3% and now it had touched around 8 times more than the original rate .
As the people who have taken loans for a house have also taken loans, on the basis of the house itself as mortgage , now this gave rise to a crisis where there was no records for the credit history of the people , people were reluctant to pay back the debt and houses were auctioned at the market price ,as supply was more than demand in the housing sector .. this led to huge losses accumulating to $2.5 trillion .
Now its global implication , as FIIs have invested in global markets such as Japan , India and to offset the losses in US market they are selling their shares and liquidating it ,leading to fast outflow of money from a country . Globally stock markets are sensitive to changes in the US market , markets are apprehensive and investors are selling their shares so there is decrease in share prices globally , indexes in Japan and India have fallen marginally. Now this resulted in a shortage of liquidity in US , a start to a recessionary phase in US economy , for the time being the federal reserve has intervened by reducing the loan rates by 500 basis points to bring about liqiduity in the US economy , thus leading to outflow of dollars into emerging markets like India .
Now it is to be seen when global markets stabilize though subprime lending will remain a achilles heel to US mortgage firms for a long time now.