The subprime mortgage crisis was a major cause the 2008 financial crisis, which then led to the worst recession since the Great Depression. This primer tracks how the subprime crisis unfolded, flattening the real estate market, creating the 2007 banking crisis and finally leading to the global recession. Get the definitions for important terms. Understand how interest rates and real estate play an integral role in the U.S. economy. Uncover resources for those who need helpt from the effects of the subprime mortgage crisis.(Updated March 20, 2012)
By March 2007, it became apparent that the housing slump was spreading to the stock markets via hedge fund investments.
By August, banks stopped lending to each other because they were afraid of getting caught with bad subprime mortgages. The Federal Reserve stepped in to restore liquidity and confidence. And stepped in. And stepped in.
By October, we learned about other debt packages, called collateralized debt obligations, that were also at risk. This speech by Federal Reserve Governor Kroszner explains why.
In November, then Treasury Secretary Paulson convinced three banks, Citigroup, JPMorgan Chase and Bank of America, to set up a $75 billion superfund. It was managed by Blackrock Investments to buy distressed portfolios of defunct subprime mortgages. No one was interested and $75 billion was not nearly enough.
banks began lending to subprime borrowers a few years ago, it seemed great. Suddenly, anyone could buy a house, even with little or no money down. But not all of those borrowers were good candidates for the loan. Their defaults helped kick off the subprime crisis.
Mortgage-backed securities repackaged subprime mortgages into investments, thus allowing them to be sold on the stock market. It also helped spread the cancer of subprime mortgages to investors throughout the U.S. and the rest of the world.