A/HRC/10/7 page 5 “Subprime” mortgage is a term used to refer to loans “given to borrowers whose incomes or credit ratings or the equity in whose property does not justify a conventional mortgage at the prevailing interest rate on prevailing terms. Instead, subprime mortgages carry a higher interest rate and are seen as having a greater risk of foreclosure for non-payment”.4 In this context, adjustable rate mortgages (ARMs) are also offered, i.e. loans with an interest rate which can significantly change over the life of the mortgage. Subprime mortgages were sold by lenders (mainly through portfolio or collateralized debt obligations) to investors globally. Over the last decade, such operations generated a global business estimated at $1.3 trillion as of March 2007.5 7. Subprime mortgages were initially promoted in some developed countries as a way to expand home ownership to high risk, often low-income families.6 This was done in a context of abundant liquidity which induced a rapid expansion of credit in many developed and emerging countries.7 Market-based housing finance has become an increasingly important activity of the financial sector and has contributed to a widespread bubble in real estate prices.8 Liberalization in mortgage markets was promoted through a range of policies and normative developments. The European Union (EU), for instance, witnessed decisions to abolish interest rate ceilings, to relax credit controls, and to end the restrictions on entry into mortgage markets.9 In the United States of America, the repeal in November 1999 of the Glass-Steagall Act allowed commercial banks to collaborate with full-service brokerage firms and participate in investment banking. 4 P. Marcuse, “Subprime housing crisis”, November 2008, available at http://www.hicnet.org/articles.asp?PID=911. 5 Associated Press, “Will subprime mess ripple through economy? Q & A: Looking at the impact of the mortgage meltdown”, 13 March 2007. 6 A recent World Bank study notes, however, that over half of subprime loans have been for refinancing existing mortgages rather than purchasing a house and that not all subprime lending has been for low-income households, with many loans made to higher income earners with poor credit records, W.B. Gwinner and A. Sanders, The Sub Prime Crisis: Implications for Emerging Markets, World Bank Policy Research Working Paper 4726, September 2008. 7 Emerging countries had no or very few subprime mortgages, with lending typically taking place on conservative terms to middle- and upper-income households employed in the formal sector. Ibid. 8 “While it has for many years played an important role in countries such as Denmark, the United States of America (which has more than $6 trillion in mortgage assets outstanding), and the United Kingdom, access to finance is now expanding elsewhere. In Western European countries, housing finance is increasing at more than 8 per cent per year, more than double the rate of growth of GDP for the past decade”, R.M. Buckley and J. Kalarickal, eds., Thirty Years of World Bank Shelter Lending: What Have We Learned?, World Bank, 2006. 9 M. Ball, RICS European Housing Review 2005, Royal Institute of Chartered Surveyors, 2005.