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Introduction

Mortgage loans are typically classified as either prime or subprime, depending on their credit risk – the risk that a borrower will default on the loan. Subprime lending is classified as B-paper or second chance lending. It is the practice of making loans to borrowers who had problems with their credit history or their inability to ensure that the monthly payment on the loans, for which they are applying, can be met from their financial income. Applying the risk to profit ratio, subprime lender offset the higher risk involved with higher interest rate. Alternately, subprime borrowers can opt for adjustable rate mortgage (ARM) which offers a lower initial interest rate. This risky yet highly profitable business had once again caused economy unrest in US. While the global market is still suffering from the impact created by the U.S. subprime market crisis, the paper aims to review on US subprime market and the economic impact on global economy.

Overview of US Subprime Market
During the fall of 2006, the U.S. subprime mortgage industry had entered a stage which many observers have begun to refer to as a meltdown. The crisis began with the bursting of the housing bubble in the U.S. and high default rates on subprime and other mortgage loans made to higher-risk borrowers with lower income or lesser credit history than "prime" borrowers. In March 2007, the estimated value of U.S. subprime mortgages was $1.3 trillion, with over 7.5 million first-lien subprime mortgages outstanding. By October 2007, the reported subprime loans with adjustable rate mortgages (ARM) were 90-days delinquent or in foreclosure proceeding was approximately identified to be at 16% or approximately US 200 billion. This had nearly tripled the delinquent rate of 2005. From a recent speech by Chairman Ben S. Bernanke , the current delinquency rate had risen to 21% in 2008. The rapid increase in subprime mortgage loan delinquencies and home...