Sub Prime Mortgage – Demystified, a little

Considering that I’ve spent a majority of the last 15 months working in the Capital Markets domain (more so on the Fixed Income products side of things), I thought the blog would be a good place to disseminate some information on the current meltdown in global stock markets.

While “Sub Prime Mortgage” has been the buzzword for almost all Business Reporters in almost all news channels for the last week or so, even I was at a loss to understand the exact reasoning behind what this term actually connoted, and how it affected markets worldwide was a little hazy for my understanding.

So after a little effort in Google and other business news websites, I finally found an article which kind of delves into what exactly caused this problem worldwide, and actually explained it in terms which even a non-financial layman could easily understand.

This article in (website of The Financial Times, London) tells us how debts with housing as collateral were highly rated because of low interest rates, which consequently led to higher yields when these instruments were clubbed together and lent out by banks and other financial institutions as Collateralised Debt Obligations (CDOs).

What then happened is that when borrowers started defaulting on these debts, this sent jitters in the market, and lenders started downgrading the quality of their debt, which in turn led to the ripple effect which is what stock markets worldwide are experiencing right now.

Hope this helped the non-finance guys a little.


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