Subprime Mortgage Crisis Explained

Finding the subprime mortgage crisis explained in a way that makes sense to a regular person can be somewhat difficult. In fact, one of the finance industry’s defining characteristics is the complicated language that its members use to describe relatively simple ideas. Here, we’ll cut through the jargon to expose the subprime mortgage crisis for what it really was— a series of bad decisions on the part of the finance industry, the government and even the American people at large.

It all started with the housing “boom” in the '90s and early 2000s. Conditions in this era of American history were ripe for this sort of boom. First and foremost, interest rates set by the Federal Reserve were very low, which meant that banks could get easy money to lend out. The American people who were experiencing something economists call the “income effect” felt richer during this cycle of high employment and output, which stimulated their demand for houses. With this increase in demand came the fast and steady rise in house prices at large.

Unfortunately, no party involved knew when enough was enough. Up to this point, everyone involved was benefiting from the hollow scheme. The financial industry packaged all the high interest rate mortgages they lent out to people and sold them to investors for a hefty profit. The government was benefiting from the booming housing market with increased tax revenue and good public perception concerning the economy. People in general were able to get themselves into houses that they could otherwise only have dreamed of. The problem, however, was that it worked so well that no one wanted to stop. To keep the money rolling in, financial companies lent money to people who couldn’t really afford the homes they were buying. These loans would become the root of the subprime mortgage crisis. The government, meanwhile, essentially turned a blind eye to the whole situation.

When those who bought homes couldn’t afford to come up with their mortgages, the bubble burst. Starting in 2007, the subprime mortgage crisis began to take its toll. Homes were being foreclosed upon in gargantuan numbers and the roughly $1.5 trillion housing investment market plummeted—with the rest of the United States economy soon to follow. To make matters worse, the way that the subprime loans were lumped together and sold as investments made it extremely difficult to pick apart the good from the bad. This left much of the financial industry in tatters, and rippled heavily throughout the rest of the US economy.

Overall, the subprime mortgage crisis doesn’t really have a single guilty party. When looked at honestly, the housing market’s run-up and eventual collapse was everyone’s fault. The government made money too easy for banks to get and loan with its low interest rates, and didn’t respond when harbingers of trouble arose. The financial industry got way too greedy, doling out high interest loans to people who weren’t financially fit enough to borrow. Even many home buyers were responsible, in that they made irresponsible financial decisions. As you can see, the subprime mortgage crisis was far from one party’s fault. It was a mistake that all parties involved made, and, as the economy recovers, one that hopefully everyone has learned from. 

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