Thanks to the invention of Wikipedia, the subprime mortgage crisis, as it is known, is an ongoing financial crisis characterised by contracted liquidity in global credit markets and banking systems. A downturn in the housing market of the United States, risky practices in lending and borrowing, and excessive individual and corporate debt levels have caused multiple adverse effects on the world economy leading to the crisis.
Below is a diagram illustrating the some key elements of the crisis:
Subprime lending is the practice of making loans to borrowers who do not qualify for market interest rates owing to various risk factors, such as income level, size of the down payment made, credit history, and employment status. The value of U.S. subprime mortgages was estimated at $1.3 trillion as of March 2007, with over 7.5 million first-lien subprime mortgages outstanding. Approximately 16% of subprime loans with adjustable rate mortgages (ARM) were 90-days delinquent or in foreclosure proceedings as of October 2007, roughly triple the rate of 2005. By January 2008, the delinquency rate had risen to 21% and by May 2008 it was 25%.
While the reasons for the crisis are varied and complex, it can be attributed to a number of factors pervasive in both the housing and credit markets, which developed over an extended period of time. Some of these include: the inability of homeowners to make their mortgage payments, poor judgment by the borrower and/or the lender, speculation and overbuilding during the boom period, risky mortgage products, high personal and corporate debt levels, financial innovation that distributed and perhaps concealed default risks, central bank policies, and regulation (or lack thereof).
Hope this provides a quick summary of what the subprime crisis is about. To read more, feel free to click this link.
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