The Sub-prime crisis is a 2007 financial crisis that started in the United States of America from the high number of defaulting borrowers with sub-prime mortgages.
During the high demand period for housing loans in the US, when the real estate sector was booming, people with a bad credit history, and a higher chance of defaulting on their payments, were providedloans at higher-than-normal interest rates (sub-prime rates). Problems in the sub-prime market began to arise as these sub-prime borrowers that did not have the capacity to repay the loan.
The elevated risks that financial institutions were taking with sub-prime mortgages in the USA began to create problems towards the end of 2006. Borrowers began to default on their loans in higher numbers,which created a global credit crisis. Central banks were forced to inject money into financial markets, more than one hundred sub-prime lenders in the United States collapsed, leading to decline in US economic activity and global economic growth was expected to slow.
A decline in economic activity in theUS resulted in lower disposable incomes and hence a decline in demand. People who were not able to pay back their Loans, lost their homes to financial institutions,which were not able to sell it in the Open markets to recover the amount lended, as the property rates had fallen tremendously due to an oversupply. This triggered the sub-prime crisis.
The world was hit by the heat of the US sub-prime crisis. It was initially thought by some that other major world economies would not be significantly affected. While the sub-prime mortgage meltdown was mostly an American problem, financial markets around the world have been affected by it either directly or indirectly, on account of US being the largest economy.
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