This was another Democrat failures. Jimmy Carter actually started the 'Neighborhood reinvestment act. This tells how it played into the banks going apeshit on lending because of bad Government policy. Then you had Obama lying out his ass blaming Bush for this when Greenspan warned this will be a problem if it is not stopped. Bush was such a coward on not defending himself from Obama blaming Bush for every failure the Democrats touch.
The subprime mortgage crisis was one of the main contributors to the 2007-2008 global financial crisis. Also known as "The Great Recession," it was the worst economic downturn since The Great Depression of the 1930s. For many Americans, it took years to recover from the financial crisis.
What was the subprime mortgage crisis?
The subprime mortgage crisis occurred from 2007 to 2010 after the collapse of the U.S. housing market. When the housing bubble burst, many borrowers were unable to pay back their loans. The dramatic increase in foreclosures caused many financial institutions to collapse. Many required a bailout from the government. Besides the U.S. housing market plummeting, the stock market also fell, with the Dow Jones Industrial Average falling by more than half. The crisis spread around the world and was the main trigger of the global financial crisis.
The subprime mortgage crisis explained in detail
Subprime mortgages are loans given to borrowers who have bad credit. They are a high credit risk because they do not have a strong credit history. They are also more likely to default than other people. During the housing boom of the 2000s, many lenders gave subprime mortgages to borrowers who were not qualified. In 2006, a year before the crisis started, financial institutions lent out $600 billion in subprime mortgages, making up almost 1 out of 4 (23.4%) mortgages.
Cheap credit and relaxed lending standards allowed many high-risk borrowers to purchase overpriced homes, fueling a housing bubble. As the housing market cooled, many homeowners owed more than what their homes were worth. As the Federal Reserve Bank raised interest rates, homeowners, especially those who had adjustable-rate mortgages (ARMs) and interest-only loans, were unable to make their monthly payments. They could not refinance or sell their homes due to real estate prices falling. Eventually, close to 5 million homes were foreclosed on since the start of the crisis.
This made a huge impact on mortgage-backed securities (MBS) and collateralized debt obligations (CDOs) -- investment products backed by the mortgages. Subprime mortgages were packaged by financial institutions into complicated investment products and sold to investors worldwide. By July 2008, 1 out of 5 subprime mortgages were delinquent with 29% of ARMs seriously delinquent. Financial institutions and investors holding MBS and CDOs were left holding trillions of dollars' worth of near-worthless investments.
The subprime mortgage crisis led to a drastic impact on the U.S. housing market and overall economy. It lowered construction, reduced wealth and consumer spending, and decreased the ability for financial markets to lend or raise money. The subprime crisis ultimately extended globally and led to the 2007-2009 global financial crisis.
A timeline of events
The cause of the crisis was years in the making and didn't happen overnight.
2000 to 2003
Interest rates during this time period were lowered from 6.5% to 1% due to the dot-com bubble and the Sept. 11, 2001 terrorist attacks. Low interest rates provided cheap credit and more people borrowed money to purchase homes. This demand helped lead to the increase in housing prices.
2004 to 2006
Home prices were rapidly rising and the Fed under Alan Greenspan raised interest rates to cool the overheated market over a dozen times. From 2004 to 2006, interest rates went from 1% to 5.25%. This slowed demand for new houses. Many subprime mortgage borrowers who were unable to afford a conventional 30-year mortgage took interest-only or adjustable-rate mortgages that had lower monthly payments.
The interest rate hikes increased the monthly payments on subprime loans and many homeowners were unable to afford their payments. They were also unable to refinance or sell their homes due to the real estate market slowing down. The only option was for homeowners to default on their loans. Home prices fell for the first time in 11 years in the fall of 2006.
2007 to 2008
As more homeowners began to default, 20 of the top 25 subprime mortgage lenders closed, stopped lending, or were sold to avoid bankruptcy. The investment banking firms Bear Stearns and Lehman Brothers went bankrupt. By the end of 2008, the U.S. was in a recession. Congress passed a Wall Street bailout package to stabilize the economy.
What caused the subprime mortgage crisis?
There are many different parties that deserve blame for the subprime mortgage crisis. It wasn't one group or individual that caused the crisis, but multiple players that were focused on short-term gains.
Financial institutions
Banks, hedge funds, investment companies, insurance companies, and other financial institutions created the MBS and CDOs. They continued to repackage and sell them to investors who believed they were safe investments. The different financial institutions aggravated the situation by taking more risk than necessary.
Mortgage lenders
Improper mortgage lending practices played a large role in the crisis. Mortgage lenders relaxed their lending standards and gave loans to people who should not have gotten a loan in the first place. They were greedy and handed out interest-only and adjustable-rate mortgages that borrowers were not able to repay. In other cases, some mortgage lenders even committed mortgage fraud by inflating borrowers' incomes so they'd qualify for a mortgage.
Credit rating agencies
Credit agencies had conflicts of interest and did not give the proper ratings many believed the subprime mortgages deserved. They gave AAA ratings to risky MBS and CDOs.
Regulators and government
Regulators repealed certain laws, giving financial institutions the ability to invest customers' money in complicated investment products. Deregulation also allowed banks to expand their markets, merging with different institutions. This made them "too big to fail." Due to the banking law changes, banks were also able to offer subprime customers interest-only and adjustable-rate loans.
Home buyers and sellers
People borrowed to buy houses even if they couldn't really afford them. While there were some buyers subject to predatory lending practices, many took on too much risk and bought houses they should not have. After the Fed raised interest rates, home buyers were unable to afford their mortgage payments.
Investors
Investors wanted investments that were low risk but earned high returns like an MBS. They fueled demand for subprime mortgages.
Each of the different parties were irresponsible and reckless in their actions. This led to the subprime mortgage crisis.
Subprime mortgage crisis effects
The subprime mortgage crisis severely weakened the global financial system. The crisis and the subsequent global financial crisis caused $7.4 trillion in stock market paper losses, and wiped out about $3.4 billion in real estate wealth. Many companies went bankrupt, and about 7.5 million Americans lost jobs, with the unemployment rate doubling to 10% in 2010. While the economy added jobs after the crisis, many were lower paying and less secure jobs. During the financial crisis, the net worth of American households declined by about $17 trillion, a loss of 26%.
The government launched several bailout programs to help stabilize the economy. By the time the programs officially ended in 2014, the Fed had pumped more than $4 trillion into the U.S. economy. As a result of the recession, Congress responded by passing multiple laws to help prevent another financial crisis from happening again. They passed the Dodd-Frank legislation, which included the Mortgage Act and the Consumer Financial Protection Act. These Acts introduced banking regulations and created a Consumer Financial Protection Bureau. Since then, mortgage lending practices have evolved to comply with the new practices required by the law.
https://www.fool.com/the-ascent/mortgages/subprime-mortgage-crisis/
https://www.thebalancemoney.com/what-caused-the-subprime-mortgage-crisis-3305696
https://en.wikipedia.org/wiki/Community_Reinvestment_Act
https://www.thebalancemoney.com/subprime-mortgage-crisis-effect-and-timeline-3305745
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