Relive the 2008 US subprime mortgage crisis, thinking that house prices will rise forever, and suddenly the bubble burst

The subprime mortgage crisis refers to a full-blown economic crisis that occurred in the United States in 2008 and then swept the world.

Before 2007, there was a sharp increase in risky mortgages in the United States, which began defaulting in 2007, leading to the worst recession in decades. The real estate boom of mid-2000, combined with low interest rates at the time, prompted many lenders to offer home loans to individuals with poor credit. When the housing bubble burst, many borrowers were unable to repay their subprime mortgages.

In 2007, the U.S. housing market was oversaturated, and people with high credit risk bought overpriced homes. In times of the housing boom, lenders offer risky mortgages, and people seem to think that this boom will last forever.

As the value of real estate declines, many mortgages total more than the total value of the home. Many homeowners find themselves unable to pay their monthly mortgages, and they are unable to refinance or sell their homes due to falling house prices. Millions of Americans who default on their mortgages cannot avoid default. This harrowing combination led to record numbers of borrowers defaulting on home loans, with nearly 5 million homes being foreclosed between 2008 and 2014. Millions of families are homeless.

This financial crisis was dubbed the "subprime crisis" because such subprime loans were considered the main trigger for the collapse. The Fed defines subprime mortgages as loans issued to borrowers who are deemed to have a higher credit risk.

These borrowers often lack a good credit history or have other characteristics that are highly correlated with the likelihood of default. Therefore, subprime eligibility refers to the borrower's credit rating, not the loan itself. In other words, subprime lending practices extend mortgages to those whose credit is not enough to lend.

Subprime loans became popular in the mid-1990s. In 1994, subprime mortgages issued in the United States totaled $35 billion. By 1999, that number had quadrupled to $160 billion. This trend continued after the turn of the century, with lenders quickly issuing hundreds of billions of dollars in risky loans. In 2006, just a year before the financial crisis officially erupted, lenders issued $600 billion in subprime mortgages

Around the same time in U.S. history, it became common for banks to issue mortgages and sell them to large investment banks, which resold or traded large amounts of mortgages by creating large amounts of securities consisting of mortgage interest. It became common for banks to issue mortgages and then sell those mortgages to other banks or investment banks within a few days, and it is still common.

In this environment, it may not be surprising that banks find themselves giving more and more mortgages to people with increasing qualifications. Not only are these loans issued to risky borrowers, up to 70% of loan applications may contain false information. Due to the generally accommodative credit atmosphere, these misrepresentations are often undetected.

The most irresponsible and most common loans are known as no income, no jobs, or no assets (called "NINJA" loans). NINJA loans can be approved without the borrower applying for financial documents. THE ISSUANCE OF NINJA MORTGAGES DOES NOT PROVIDE ANY INDEPENDENT VERIFICATION OF THE BORROWER'S ABILITY TO REPAY THE LOAN. Unsurprisingly, many of these borrowers end up being unable to repay their mortgages.

Improper mortgage practices played an important role in the financial collapse. However, that's not all there is to it. In fact, activity in the real estate and secondary financial services markets is also an important factor.

First, the valuation of houses is too high, pushing up real estate prices across the country. In the booming housing market of the 1990s and early 2000s, appraisers often overestimated housing values or employed incomplete valuation methods. This has led to a surge in house prices in the real estate market. Borrowers, in turn, apply for loans at an amount higher than the value of open market house prices. Some even argue that overvalued houses are the real source of the financial crisis.

Mortgage securitization could be the last straw that broke the camel's back. Asset securitization is a necessary and common way of doing things in financial markets. Securitization is the practice of converting assets, such as mortgages, into securities, such as stocks and bonds, by bringing assets together and collecting regular income cash flow from newly formed securities.

The process is very lucrative, and banks believe that whether or not any borrower defaults, they will make a profit. After all, if they can't make money from a loan, they can still make money by issuing securities or by foreclosing the home in the event of a borrower defaulting. As a result, lenders were incentivized to issue as many home loans as possible as a result, and banks began to ramp up lucrative mortgage securitizations and the sale of collateralized debt (CDO) businesses.

Of course, the concept of diversification of risk only works when most loans are repaid. If the loan default rate is too high, the value of these securities will plummet. At that point, the remaining investment banks that hold these huge securities are forced to bear huge portfolio losses. Those losses led to the bankruptcies of large investment banks such as Bear Sterns and Lehman Brothers, as well as the bankruptcy of Indymac, one of the largest mortgage issuers in the United States.