Abstract

In 2006, with rising interest rates and declining house prices, the subprime mortgage borrowers in the US were seriously affected, with several of them failing to make payments on their mortgage loans. Over time, the crisis intensified, with increasing numbers of delinquencies leading to foreclosures, and ending up in repossessions. The secondary mortgage market was also affected by the crisis, and with the contagion spreading beyond sub prime securities, liquidity in the credit market dried up as banks and other financial institutions, fearing counterparty risks, became increasingly reluctant to lend to each other. The case discusses the subprime mortgage crisis in the US and the circumstances that led to the crisis. It analyzes the effects of this crisis on different sectors of the US economy. The case also describes different initiatives taken by the US government and the US Federal Reserve.

Learning Objectives

The case is structured to achieve the following Learning Objectives:

• Understand the origins of the US subprime mortgage crisis
• Analyze the effects of the crisis on the US economy
• Evaluate the initiatives of the US government and the US Federal reserve to tackle the crisis
• and Analyze the long term impact of the crisis on the world’s financial markets and the US economy.

Keywords

US Housing Market, Interest rate cut, Money auctions, Subprime Crisis, Mortgage backed Securities, Housing bubble, Secondary Mortgage market, Federal Funds Rate, Collateralized Debt obligations, US Federal Reserve, Recession, Bear Stearns, Inflation