How Sub Prime Loans Led To A Global Recession

Subprime loan means a loan that provides the category of the most risky consumer loans. This provides a loan to borrowers who have poor credit, limited debt experience and overlooked payments or bankruptcy records. In subprime loans, lenders are charged higher interest rates because lenders are exposed to higher risks as lenders are at higher risk of not obtaining returns. Between 1997 and 2006, typical US house prices rose 124%. Many people think that the rising trend of this house price will continue in the future.

The recession is that the GDP growth rate of the country is declining for 2 consecutive quarters of the year. There is still a deceleration in several quarters before the economic recession. The default of subprime mortgage default (mortgage default) caused a major economic crisis in the United States. Ripple effects are felt throughout the world, affecting mainly in Europe and the rest of the world, leading to a global economic downturn. This impact is influenced by the economic policy adopted by India, but it is still felt through demand and price.

Events that led to the financial crisis in 2008 and the subsequent economic downturn may have occurred from 2006 to 2007. The crisis began with subprime mortgage began showing defaults. By 2007, the number of mortgage defaults became very large, mortgage-backed securities (CMO) securities were affected and did not show expected return. To increase the complexity of the situation, a major investment bank has signed an insurance company (mainly AIG). Therefore, in case of default, CMO insured. This is called credit default swap (CDS). The CDS operation method is that the insurance company provides the CMO guarantee insurance to the purchaser and the purchaser pays the insurance company to the insurance company at the time specified by the insurance contract.

A series of events that led to the economic downturn began with the collapse of the US housing loan bubble. This led to the collapse of mortgage debt (CDO) securities related to mortgage loans. As a result, financial institutions selling and guaranteeing CDO securities collapse, causing credit contraction and liquidity loss, which affects other companies, which is reflected in the sharp decline in the stock market it was done. There are many factors that are intertwined to cause severe lack of credibility in the US financial system such as overestimation of subprime mortgage, inappropriate practice in related securities trading, and excessive expansion of financial credit . Destructive chain reaction in other parts of the world