Subprime mortgage crisis
What is the subprime mortgage crisis?
The subprime mortgage crisis originated in the United States and from 2007 to 2010 developed into a full-blown financial crisis that caused panic around the world. It was caused by an expansion of mortgage credit in the early to mid-2000s and a poor understanding of credit risk by financial institutions.
Where have you heard about the subprime mortgage crisis?
The subprime mortgage crisis led to the greatest financial emergency since the Wall Street Crash of 1929 and the following Great Depression. Household names such as Wall Street giants Bear Stearns and Lehman Brothers were either taken over or went bankrupt and US stocks fell by 54% over 18 months.
What you need to know about the subprime mortgage crisis.
The early 2000s was a period of low interest rates in the United States and fund managers’ search for yield led them to mortgage backed securities (MBS), which were given AAA status by the ratings agencies. At the same time, there was an explosion of lending to individuals who might not have previously qualified for mortgages, but were now classified as ‘sub-prime’ borrowers, approved for ‘no documentation’ and ‘low documentation’ loans. When house prices began to fall in 2006, the demand for subprime MBS evaporated, and those institutions with a large exposure to these products suffered astonishing losses.