Subprime mortgage crisis

2007 subprime mortgage financial crisissubprime crisissub-prime mortgage crisissubprime mortgagescrisismortgage marketssubprime mortgage financial crisisfinancial crisismortgage crisisU.S. subprime mortgage crisis
The United States subprime mortgage crisis was a nationwide financial crisis, occurring between 2007 and 2010, that contributed to the U.S. recession of December 2007 – June 2009.wikipedia
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United States housing bubble

Great Recessionhousing bubblehousing crisis
It was triggered by a large decline in home prices after the collapse of a housing bubble, leading to mortgage delinquencies and foreclosures and the devaluation of housing-related securities.
Increased foreclosure rates in 2006–2007 among U.S. homeowners led to a crisis in August 2008 for the subprime, Alt-A, collateralized debt obligation (CDO), mortgage, credit, hedge fund, and foreign bank markets.

Collateralized debt obligation

CDOcollateralized debt obligationsCDOs
The housing bubble preceding the crisis was financed with mortgage-backed securities (MBSes) and collateralized debt obligations (CDOs), which initially offered higher interest rates (i.e. better returns) than government securities, along with attractive risk ratings from rating agencies.
These CDOs have been called "the engine that powered the mortgage supply chain" for subprime mortgages, and are credited with giving lenders greater incentive to make subprime loans, leading to the 2007-2009 subprime mortgage crisis.

Financial crisis

economic crisisfinancial criseseconomic crises
The United States subprime mortgage crisis was a nationwide financial crisis, occurring between 2007 and 2010, that contributed to the U.S. recession of December 2007 – June 2009.
The subprime mortgage crisis and the bursting of other real estate bubbles around the world also led to recession in the U.S. and a number of other countries in late 2008 and 2009.

Subprime mortgage crisis solutions debate

credit easingregulationsolutions
A variety of solutions have been proposed by government officials, central bankers, economists, and business executives.
The Subprime mortgage crisis solutions debate discusses various actions and proposals by economists, government officials, journalists, and business leaders to address the subprime mortgage crisis and broader financial crisis of 2007–08.

Mortgage-backed security

mortgage-backed securitiesmortgage bondmortgage backed securities
It was triggered by a large decline in home prices after the collapse of a housing bubble, leading to mortgage delinquencies and foreclosures and the devaluation of housing-related securities. The housing bubble preceding the crisis was financed with mortgage-backed securities (MBSes) and collateralized debt obligations (CDOs), which initially offered higher interest rates (i.e. better returns) than government securities, along with attractive risk ratings from rating agencies.
These subprime MBSs issued by investment banks were a major issue in the subprime mortgage crisis of 2006–2008.

Bear Stearns

Bear Stearns & Co.Bear WagnerBear, Stearns & Company
This became apparent by July 2007, when investment bank Bear Stearns announced that two of its hedge funds had imploded. During 2008, three of the largest U.S. investment banks either went bankrupt (Lehman Brothers) or were sold at fire sale prices to other banks (Bear Stearns and Merrill Lynch).
The company's main business areas before its failure were capital markets, investment banking, wealth management, and global clearing services, and it was heavily involved in the subprime mortgage crisis.

Shadow banking system

shadow bankingshadow bankshadow banks
Policymakers did not recognize the increasingly important role played by financial institutions such as investment banks and hedge funds, also known as the shadow banking system. In a June 2008 speech, President of the NY Federal Reserve Bank Timothy Geithner, who later became Secretary of the Treasury, placed significant blame for the freezing of credit markets on a "run" on the entities in the "parallel" banking system, also called the shadow banking system.
Shadow banking has grown in importance to rival traditional depository banking, and was a primary factor in the subprime mortgage crisis of 2007-2008 and the global recession that followed.

Too big to fail

too-big-to-failtoo big to let failToo Large to Fail
Bernanke also discussed "Too big to fail" institutions, monetary policy, and trade deficits.
He continued that: "Governments provide support to too-big-to-fail firms in a crisis not out of favoritism or particular concern for the management, owners, or creditors of the firm, but because they recognize that the consequences for the broader economy of allowing a disorderly failure greatly outweigh the costs of avoiding the failure in some way. Common means of avoiding failure include facilitating a merger, providing credit, or injecting government capital, all of which protect at least some creditors who otherwise would have suffered losses. ... If the crisis has a single lesson, it is that the too-big-to-fail problem must be solved."

Credit rating agency

credit rating agenciesrating agencyrating agencies
The housing bubble preceding the crisis was financed with mortgage-backed securities (MBSes) and collateralized debt obligations (CDOs), which initially offered higher interest rates (i.e. better returns) than government securities, along with attractive risk ratings from rating agencies.
Agencies were subjected to dozens of lawsuits by investors complaining of inaccurate ratings following the collapse of Enron, and especially after the US subprime mortgage crisis and subsequent financial crisis of 2007–2008.

Household debt

household leveragehousehold
Underlying narratives #1-3 is a hypothesis that growing income inequality and wage stagnation encouraged families to increase their household debt to maintain their desired living standard, fueling the bubble.
A significant rise in the level of this debt coincides historically with many severe economic crises and was a cause of the U.S. and subsequent European economic crises of 2007–2012.

European debt crisis

European sovereign debt crisisEurozone crisisEuropean sovereign-debt crisis
Europe also continued to struggle with its own economic crisis, with elevated unemployment and severe banking impairments estimated at €940 billion between 2008 and 2012.
When the global crisis disrupted the markets and the world economy, together with the US subprime mortgage crisis and the eurozone crisis, Portugal was one of the first economies to succumb, and was affected very deeply.

Household income in the United States

Median household incomeMedian incomehousehold income
Underlying narratives #1-3 is a hypothesis that growing income inequality and wage stagnation encouraged families to increase their household debt to maintain their desired living standard, fueling the bubble.
The late-2000s recession began with the bursting of the U.S. housing bubble, which caused a problem in the dangerously exposed sub prime-mortgage market.

Hyman Minsky

Financial Instability HypothesisHyman P. MinskyMinsky
Keynesian economist Hyman Minsky described how speculative borrowing contributed to rising debt and an eventual collapse of asset values.
Minsky's economic theories were largely ignored for decades, until the subprime mortgage crisis of 2008 caused a renewed interest in them.

Timothy Geithner

Tim GeithnerTimothy F. GeithnerGeithner
In a June 2008 speech, President of the NY Federal Reserve Bank Timothy Geithner, who later became Secretary of the Treasury, placed significant blame for the freezing of credit markets on a "run" on the entities in the "parallel" banking system, also called the shadow banking system.
At the New York Fed, Geithner helped manage crises involving Bear Stearns, Lehman Brothers, and the American International Group; as Treasury Secretary, he oversaw allocation of $350 billion under the Troubled Asset Relief Program, enacted during the previous administration in response to the subprime mortgage crisis.

Repurchase agreement

reporepurchase agreementsrepo rate
Examples of vulnerabilities in the private sector included: financial institution dependence on unstable sources of short-term funding such as repurchase agreements or Repos; deficiencies in corporate risk management; excessive use of leverage (borrowing to invest); and inappropriate usage of derivatives as a tool for taking excessive risks.
In 2007-2008, a run on the repo market, in which funding for investment banks was either unavailable or at very high interest rates, was a key aspect of the subprime mortgage crisis that led to the Great Recession.

No income, no asset

NINAincome documentationNINJA loan
"No Income, No Assets" (NINA) or Ninja loans eliminated the need to prove, or even to state any owned assets.
NINA programs are ostensibly created for those with hard to verify incomes (waiters, etc.) but in actuality have been popularly used in situations where aggressive mortgage lenders and brokers did not want any trouble qualifying otherwise non-qualifying loans, thus becoming a significant factor in the subprime lending crisis.

Warren Buffett

Warren E. BuffettWarren BuffetWarren Edward Buffett
During May 2010, Warren Buffett and Paul Volcker separately described questionable assumptions or judgments underlying the U.S. financial and economic system that contributed to the crisis.
Buffett ran into criticism during the subprime crisis of 2007–2008, part of the recession that started in 2007, that he had allocated capital too early resulting in suboptimal deals.

Moral hazard

consequences of the great risksbreakdown in accountabilitydemoralizing effect
On Wall Street and in the financial industry, moral hazard lay at the core of many of the causes.
During the years leading up to the subprime mortgage financial crisis, private label securitizations grew as a share of overall mortgage securitization by purchasing and securitizing low-quality, high-risk mortgages.

Balance sheet recession

balance sheet recessions
Recent examples include Japan's recession that began in 1990 and the U.S. recession of 2007-2009.

Fannie Mae

Federal National Mortgage AssociationFNMAFannie Mae Foundation
Lending standards deteriorated particularly between 2004 and 2007, as the government-sponsored enterprise (GSE) mortgage market share (i.e. the share of Fannie Mae and Freddie Mac, which specialized in conventional, conforming, non-subprime mortgages) declined and private securitizers share grew, rising to more than half of mortgage securitizations.
Then in 2003–2004, the subprime mortgage crisis began.

Goldman Sachs

Goldman Sachs InternationalGoldman, Sachs & Co.Goldman Sachs Group
The remaining two investment banks, Morgan Stanley and Goldman Sachs, opted to become commercial banks, thereby subjecting themselves to more stringent regulation.
As a result of its involvement in securitization during the subprime mortgage crisis, Goldman Sachs suffered during the financial crisis of 2007–2008, and received a $10 billion investment from the United States Department of the Treasury as part of the Troubled Asset Relief Program, a financial bailout created by the Emergency Economic Stabilization Act of 2008.

Lehman Brothers

LehmanLehman Brothers Kuhn LoebLehman Brothers Holdings Inc.
During 2008, three of the largest U.S. investment banks either went bankrupt (Lehman Brothers) or were sold at fire sale prices to other banks (Bear Stearns and Merrill Lynch).
On September 15, 2008, the firm filed for Chapter 11 bankruptcy protection following the exodus of most of its clients, drastic losses in its stock, and devaluation of assets by credit rating agencies, largely sparked by a loss of confidence, Lehman's involvement in the subprime mortgage crisis, and its exposure to less liquid assets.

Virtuous circle and vicious circle

vicious circlevicious cyclevirtuous circle
This vicious cycle was at the heart of the crisis.
The contemporary [[Subprime mortgage crisis#Understanding the causes and risks of the subprime crisis|subprime mortgage crisis]] is a complex group of vicious circles, both in its genesis and in its manifold outcomes, most notably the late 2000s recession.

Federal Reserve

Federal Reserve SystemUS Federal ReserveU.S. Federal Reserve
Policymakers did not recognize the increasingly important role played by financial institutions such as investment banks and hedge funds, also known as the shadow banking system.
In order to address problems related to the subprime mortgage crisis and United States housing bubble, several new tools have been created.

Foreclosure

foreclosedforecloseforeclosures
Defaults and foreclosure activity increased dramatically as easy initial terms expired, home prices fell, and adjustable-rate mortgage (ARM) interest rates reset higher.
In the wake of the United States housing bubble and the subsequent subprime mortgage crisis there has been increased interest in renegotiation or modification of the mortgage loans rather than foreclosure, and some commentators have speculated that the crisis was exacerbated by the "unwillingness of lenders to renegotiate mortgages".