Circa 2005, the US housing market was booming. As conveyed by the June 2005 Time magazine’s cover title “Home $weet Home,” the housing market was minting money for everyone. Amid this, every individual in the US was living the American dream to own a house. Housing prices were consistently rising and appreciation was the highest over the past 30 years. This, coupled with historically low interest rates, prompted most people to buy “investment properties”. In the US mortgage market, by borrower quality, a mortgage is prime, sub-prime, or Alt-A. Prime borrowers are those who have good credit scores, a strong debt-to-income ratio, provide required documentation, tax history, residence records and so on. The mortgage is a first-lien mortgage. A sub-prime mortgage is to a borrower who does not qualify as per prime norms, or it is a second-lien mortgage. An Alt-A is to a borrower who is not necessarily poor quality, but does not qualify for prime lending due to documentation problems. Understandably, spreads are quite high in sub-prime lending; yet defaults were low largely due to home prices. Buoyed by this, US banks pressed the accelerator on sub-prime mortgage loans. The outstanding volume is estimated $1.8 trillion. Many of the mortgages originated in 2005 and 2006 had features to make the mortgage enticing — interest-only mortgage, negative amortisation mortgage and teaser-rate adjusted-rate mortgages.   more »