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Subprime Special (Contd)


Subprime credit cards

Beginning in the 1990s, credit card companies in the United States began offering subprime credit cards to borrowers with low credit scores and a history of defaults or bankruptcy. These cards often begin with low credit limits and usually carry extremely high fees and interest rates as high as 30% or more. In 2002, as economic growth in the United States slowed, the default rates for subprime credit card holders increased dramatically, and many subprime credit card issuers were forced to scale back or cease operations.

Recently, starting in 2007, many new subprime credit cards have begun to emerge in the market. As more vendors have emerged the market has become more competitive and issuers have been forced to make the cards more attractive to consumers. Interest rates on subprime cards now start at 9.9% but in some cases still range up to 24% APR.

U.S. subprime mortgage crisis

Beginning in late 2006, the U.S. subprime mortgage industry entered what many observers now refer to as a meltdown. A steep rise in the rate of subprime mortgage foreclosures has caused many subprime mortgage lenders to fail or file for bankruptcy.The failure of these companies has caused stock prices in the $6.5 trillion mortgage bundled securities market to collapse, threatening impacts on the U.S. housing market and economy as a whole. The crisis is ongoing and is now receiving considerable attention.

One of the reasons for the meltdown is the falling home prices since 2005 in US. As housing prices rose from 2000 to 2005, borrowers having difficulty meeting their payments were still building equity, thus making it easier for them to refinance or sell their homes. But as home prices have weakened in many parts of the country, these strategies have become less available to subprime borrowers.

Several industry experts have suggested that the crisis may soon worsen. Lou Ranieri, formerly of Salomon Brothers, considered the inventor of the mortgage-backed securities market in the 1970s, warned of the future impact of mortgage defaults: "This is the leading edge of the storm. If you think this is bad, imagine what it's going to be like in the middle of the crisis."

Some economists, including former Federal Reserve Board chairman Alan Greenspan, have expressed concerns that the subprime mortgage crisis will affect the housing industry and even the entire U.S. economy. In such a scenario, anticipated defaults on subprime mortgages and tighter lending standards could combine to drive down home values.

Concerns about the subprime mortgage lending industry is causing a sharp drop in stocks across the Nasdaq and Dow-Jones, which has in turn affected almost all the stock markets worldwide. Record lows are being observed in stock market prices across the Asian and European continents. NSE & BSE has also been affected by it.

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(This content is mainly sourced from Wikipedia)

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