27-09-2013, 03:29 PM
MORTGAGE SECURITIZATION MARKET IN INDIA, PRE AND POST SUBPRIME CRISIS
Introduction
The economy of one of the world‘s most powerful country started to tremble at the dawn of
2007. The 401Ks a social security that were once solid started to dwindle. Cash reserves
started to run dry and the start of a crisis was upon the people of the United States of
America. This Crisis was called the Subprime crisis. The US Subprime crisis of 2007-2009
was the start of the Global financial meltdown. With real estate prices falling and the
subprime mortgage rates, typically adjusted rate mortgages (ARM), on the rise there was an
increase in deliquesce. This led to foreclosures on mortgaged properties. As we see the crisis
was called the subprime crisis, we can be sure that subprime lending was surely a major
cause for the crisis. In order to proceed further will need to know what is subprime credit and
subprime mortgage loans refer to. Subprime credit is the extension of credit facilities to
borrowers who have deficient credit history or inadequate documentation (Ravi Saraogi
2007). Subprime Mortgage loans are thus a loan that is granted to mortgagors who do not
qualify for market interest rates owing to various risk factors, such as income level, size of
the down payment made, credit history and employment status (Mark Adam Petersen 2010).
In the subprime market the interest rates are extremely high. This is based on the logic that
higher the risk, higher will be the interest on such investment. The US Subprime mortgage
marked had expanded rapidly during the decade preceding 2005. Approximately 20% of the
loans in 2005 were of a subprime nature. It may be said that out of the total debt, $600 billion
originated in the year 2006(Ravi Saraogi 2007). This gives us a magnitude of the growth of
subprime lending. Now it is only understandable that with the rise of subprime mortgage
there is also a rise in the securitization of Subprime Mortgage loan assets in order to issue
Subprime Mortgage backed securities (SMBS). Thus with the fall in the real-estate prices in
the US, investors in SMBS suffered a great amount of losses due to deliquesce of the
numerous subprime borrowers.
Analysis of data
The analysis of data is done in such a way that we may be able to get a picture of the
securitization market in the pre and post subprime crisis periods.
We collected the following data. The date was first organised based on a time line starting
from the year 2004 up to the year 2011. Our study compares two major economic regions that
are India and The United States of America.
The Indian Aspect
We have first represented and analysed the data of the Indian securitization market. It
concentrates on the Mortgaged Backed Securities (MBS).
Source: ICRA rating Feature from 2004 – 2011
There has been a steady growth in the MBS, from its first issue in the year 2000. From then
up until the year 2006 there was a steady and continued growth in the issuance of MBS. Note
that our study period, which is from 2004 to 2011, was so selected because by 2004 the MBS
had grown to be a preferred method of investment. In 2004 MBS contributed to 21.26% of
the total securitization market. You will note from the above that the trend of growth took a
turn in the year 2006, where the issuance dropped by 68%. It then dropped even further to
reach an all-time low in the year 2008, with an issuance of only 5.9 billion. That is there was
a 63% drop in the issuance from the year 2007 to 2008. After this dip the market started to
pick up again in the year 2009 and by the end of the year 2011 the total issuance of MBS was
50.29 billion and contributed to 16% of the total share in the structured finance market. The
growth trend in MBS issuance and the share of MBS in the structured finance market is
shown in the graphs below.