Sub Prime Crisis...

This is the Information I got from my friend Manoj who is working in a recruiting company in bangalore and has worked in mortgages..

Sub prime crisis is the root cause of all financial problems in USA. Although I have heard about that,I didnt know about that,until manoj clarified me.

...How we calculate your eligibility : Suppose u have an income of Rs50000 per month., the bank assumes that you need 45 % of that to run your house.
So we take out 55% as your potential EMI.
Supposing you have other loans running, thats also deducted from this..eg:Income = 50000
55% of this : 27500
u have a personal/carloan EMI of :7000
Net EMI possible = 20500
Now the bank assumes that you can pay 20500 permonth for your homeloan.
There are 2 types of interst rates.Floating and fixed.
Fixed rates remain unchanged for the tenure of the loan, and floating would keep varying with the bank changing the rates.The eligibility of loan is a division of Net EMI possible and EMI par lac.
Homeloan rates in 2006 Jan was 7.00% floating, This means for a 20 year loan , the EMI would have been apprx 650 per lac .
Eligibility at Net EMI of 20500 = 31 lacs. Assume he took 31 lacs as his loan.
As the market fluctatued and rates went up, the same customer is now at 12.5% rate of interst..New EMI per lac is 12000 per month.
His EMI payable now on 31 lacs is around Rs 37000 permonth.How much wud his salary have gone up??? Even at a increase of a decent 10% per year, he wud be at 60000 now... His current running cost = 37000 (homeloan) + 7000 (other loan) = 44000 on EMis alone..Inflation is at 12%... add other running costs, and he wud have nothing to live on.You call it sub-prime, bad credit, bad finance management .... he has no option but to default...

So he can't repay the loan resulting in unpaid debts for the bank and economy shatters...