What Is a Subprime Mortgage?
How Did the Subprime Mortgage Crisis Start?
In what looked to be a solid economy after a brief early 2000s recession, more and more people with struggling credit were able to qualify for subprime mortgages with manageable rates, and happily acted on that.
As prices rose and people expected a continuation of that, investors who got burned by the dot com bubble of the early 2000s and needed a replacement in their portfolio started investing in real estate.
After the lenders approved and gave out the loan, that loan would be sold to an investment bank.
The investment bank would then bundle this mortgage with other similar mortgage for other parties to invest in, and the lender would, as a result of the sale, have more money to use for home loans.
When the Fed began raising interest rates over and over, those loans became more expensive and the borrowers found themselves unable to pay it off.
Effects of the Mortgage Crisis Home prices fell tremendously as the housing bubble completely burst.
The banks foreclosed on their houses.
They were forced to close their subprime lenders, and despite their many attempts to stop the bleeding (such as issuing stock) they continued to take on losses until, on Sept. 15, 2008, Lehman Brothers applied for bankruptcy.