Consequently, mortgage payments started rising, while housing prices started to ease. Low/negligible margin financing incentivised default by the sub-prime borrowers. Although the loans were supposedly securitized and sold to the off balance sheet special institutional vehicles (SIVs), the losses were ultimately borne by the banks and financial institutions wiping off a significant fraction of their capital.
It is especially important not to become complacent during a period of excellent macroeconomic performance about the underlying strength of balance sheet positions, debt-income ratios, credit quality, quality of bank credit risk management, and adequacy of prudential supervision.