Beginning in late 2006, the US subprime mortgage industry entered what many observers have begun to refer to as a meltdown. A steep rise in the rate of subprime mortgage defaults and foreclosures has caused more than 100 subprime mortgage lenders to fail or file for bankruptcy, most prominently New Century Financial Corporation, previously the nation’s second biggest subprime lender. The failure of these companies has caused prices in the $6.5 trillion mortgage backed securities market to collapse, threatening broader impacts on the US housing market and economy as a whole. The crisis is ongoing and has received considerable attention from the US media and from lawmakers during the first half of 2007.

However, the crisis has had far-reaching consequences across the world. Tranches of sub-prime debts were repackaged by banks and trading houses into attractive-looking investment vehicles and securities that were snapped up by banks, traders and hedge funds on the US, European and Asian markets.

Thus when the crisis hit the subprime mortgage industry, those who bought into the market suddenly found their investments near-valueless or impossible to accurately value. Being unable to accurately assess the value of an asset leads to uncertainty. With market uncertainty, banks reined in their lending to each other and to business, leading to rising interest rates and difficulty in maintaining credit lines. As a result, ordinary, run-of-the-mill and healthy businesses across the world with no direct connection whatsoever to US sub-prime suddenly started facing difficulties or even folding due to the banks’ unwillingness to budge on credit lines.

Observers of the meltdown have cast blame widely. Some have highlighted the practices of subprime lenders and the lack of effective government oversight. Others have charged mortgage brokers with steering borrowers to unaffordable loans, appraisers with inflating housing values, and Wall Street investors with backing subprime mortgage securities without verifying the strength of the underlying loans. Borrowers have also been criticized for entering into loan agreements they could not meet.

Many accounts of the crisis also highlight the role of falling home prices since 2005. As housing prices rose from 2000 to 2005, borrowers having difficult 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. Lewis Ranieri, formerly of Salomon Brothers, considered one of the inventors of the mortgage-backed securities market in the 1970s and 1980s, 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?” Echoing these concerns, consumer rights attorney Ackelsberg predicted in testimony to the US Senate Banking Committee that five million foreclosures may occur over the next several years as interest rates on subprime mortgages issued in 2004 and 2005 reset from the initial, lower, fixed rate to the higher, floating adjustable rate or “adjustable rate mortgage”.Other experts have raised concerns that the crisis may spread to the so-called Altemative-A (Alt-A) mortgage sector, which makes loans to borrowers with better credit than subprime borrowers at not quite prime rates.