Subprime mortgage crisis

SUBPRIME MORTGAGE CRISIS

The immediate trigger of the 2008 financial crisis that started on the United States was the bursting of the US housing bubble, which saw its peak from the years of 2005-2006. Incredibly high default rates on “subprime” and on “adjustable rate mortgages” began to increase immediately after. From 2004-2007, lenders began originating big amounts of high risk mortgages. A long term trend of housing prices and an increase in incentives such as easy initial terms and conditions, ended up encouraging borrowers to assume difficult mortgages, believing they would be able to refinance these loans at favorable terms. Some of the worst performing loans were securitized by diverse private investment banks. By the time interest rates rose in the US, housing prices began to drop moderately around 2006 and 2007 in several regions of the US. Consequently, the process of refinancing these loans became more expensive. By then, defaults increased dramatically, the home prices didn’t go up as expected, and the mortgages interest rates reached higher levels.
In the years anticipating the financial crisis, the US received significant amounts of foreign investments, which had their attention caught by the great inflows of money entering the American economy, combined with low interest rates. A mix of low interest rates with easy credit conditions encouraged millions of people to invest, contributing to the development of both housing and credit bubbles. With tons of varieties of loans and the facility to obtain credit, consumers assumed huge amounts of debt.
An important contributor to the financial crisis was the “mortgage backed securities – MBS”, which have their value derive from mortgage payments and housing prices. With the housing boom that took place on the years leading up to the crisis, MBS were extremely common, and enabled various investors and financial institutions such as banks, hedge funds etc. to invest on the housing market. As the