Introduction Subprime mortgage lending has offered funding to an estimated 5 million home purchasers which includes about 1 million first-time home purchasers. Thus, it has contributed to growth of housing sector in USA. However, cost has outweighed the benefits as predatory lending practices have resulted in creation of housing loans that is very difficult to modify and there is worst ramification due to vast borrowers default. A subprime borrower is an individual who does have poor track record of debt administration and has a very low credit scores. As such, he has been enticed to pay higher interest rates to pay off the lenders for assuming such extra credit risk. Subsequently, subprime loans were divested to “investment bankers” who employed them later as security for bonds referred as “mortgage backed securities.” Due to default by the homeowners, these bonds supported by the loans have lost noteworthy cost, thereby resulting volatility in financial markets. (Ebony 2008) This research essay analyses in detail about the causes of the subprime mortgage crisis and offer a regulatory proposal and change to minimise the impact of the current crisis and prevent recurrence in future. What is subprime mortgage? If a distinctive homebuyer with blurred credit record avails a home loan for $ 200000 mortgage which carries an interest rate of 7% and say a start monthly instalment of $ 1530. For the last two year, he was able to repay the monthly instalment without any default. However, the trouble started when the interest rate increased to 11.5% at the start of third year. He was forced to pay an additional amount of $625 every month due to hike in interest rates. He was unable to meet his mortgage instalments and as a result, he lost his home as the mortgage company took over the possession of his home. This home loan tragedy amplified by many magnitude triggered the meltdown in U.S.A and commonly known as “subprime mortgage.” Subprime mortgage loan is known as risky loan as these normally include characteristics that embolden the risk of foreclosure. Such characteristics include balloon payments, adjustable interest rates, loan with no or little documentations and loan prepayment penalties. The main predicament of today’s subprime mortgage is mainly due to adjustable –interest mortgage known as ‘2/28” that includes bi-annual interest rate fine-tuning after completion of a two-year fixed-rate period. The start fixed rate period is always known as “teaser” rate or a discounted rate and hence rate adjustment could pave to a significant higher repayment instalment. This process is known as “payment shock” and this category of loan sometimes known as “exploding ARM’s.” Further, an increase in share of loan products in the subprime market that actually restrict the quantum of equity a borrower builds and these home loans carry a high risk or payment shock, it may restrict homeowner’s capacity to acquire the equity required to refinance out of an unaffordable loan. At the end of year 2008, about 2.21 million homeowners in the subprime market either hold subprime mortgages that may fail over the coming years or lost their homes to foreclosure as stated above. Further, subprime mortgage has affected black community as more than half of the black