Sub prime Lending Crisis

Is the Sub prime Lending Crisis taking down all the Economies of the World?

We all have heard about this disastrous lending crisis that is threatening to knock down the world economy. What do you and I really understand when we hear phrase "sub prime"? Who does it affect? How does it have an impact on the world's economy? In the following article we will elaborate about this crisis, and its consequences.

What does the phrase "sub prime" mean?

Let's start from the beginning. A "prime" borrower means a borrower with a credit history that is perfect, and therefore when applies for a crisis loan, he will be eligible for very good conditions due to his good credit rating (the interest rate, the options for repayment…). A "sub prime" is a borrower with a bad credit history or low income that applies for a very large amount of money (to buy a house) and he is given the loan with no consideration to his financial condition, (the amount given does not match the credit rating).

How did this happen?

The loan crisis began when the housing bubble in the USA burst in 2006, before then, loans were given and encouraged to sub prime borrowers for a low interest rate in the first two years, later on the interest was subject to rise and it was believed the sub prime borrowers were able to repay the loan with its higher interest. When the sub prime borrowers two years later were not able to repay the loan since the interest rate ascended greatly, they had to add every month more and more money in order to keep the house in their position. When they were not able to do so, the banks did not receive the money and up to 79% of the housing was facing foreclosure. This had cost the US banks, 200-300$ billion. On the date of 09/28/2007 a well known online banking company "Bank-Net" declared bankruptcy because of the sub prime loan crisis. They had endured enormous loss.

Although, the crisis had occurred in the borders of the US it had deeply affected the world and has grave consequences on the UK economy. The impact on the world's economy resulted in a 10-25% decrease in stock exchange markets. In addition the US dollar had lost its value in comparison to the rest of the world's currency and thus many investors suffered since they had invested in the US.

As of March 1, 2008 analysts from three large financial companies had estimated the impact of the crisis would be between U.S. $350-600 billion. This is the reason why many institutions forecast that the sub prime lending crisis is taking the world's economy down. The former Chairman of the US Federal Reserve had said that this present credit crisis will end. Once the new homes that were built will liquidate, the depression of the price homes will end as well. After a time of adjustment and healing, the US, UK and the world's economy will stand again on their feet, and business will be back to normal. Up until then we are having to face with a hopefully controlled loan crisis that governments can support.