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Subprime mortgage crisis

The American subprime mortgage crisis was a multinational financial crisis that occurred between 2007 and 2010 that contributed to the 2007–2008 global financial crisis. The crisis led to a severe economic recession, with millions losing their jobs and many businesses going bankrupt. The U.S. government intervened with a series of measures to stabilize the financial system, including the Troubled Asset Relief Program (TARP) and the American Recovery and Reinvestment Act (ARRA).

The collapse of the United States housing bubble and high interest rates led to unprecedented numbers of borrowers missing mortgage repayments and becoming delinquent. This ultimately led to mass 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. Despite being highly rated, most of these financial instruments were made up of high-risk subprime mortgages.


While elements of the crisis first became more visible during 2007, several major financial institutions collapsed in late 2008, with significant disruption in the flow of credit to businesses and consumers and the onset of a severe global recession. Most notably, Lehman Brothers, a major mortgage lender, declared bankruptcy in September 2008. There were many causes of the crisis, with commentators assigning different levels of blame to financial institutions, regulators, credit agencies, government housing policies, and consumers, among others.[2] Two proximate causes were the rise in subprime lending and the increase in housing speculation. Investors, even those with "prime", or low-risk, credit ratings, were much more likely to default than non-investors when prices fell. These changes were part of a broader trend of lowered lending standards and higher-risk mortgage products, which contributed to U.S. households becoming increasingly indebted.


The crisis had severe, long-lasting consequences for the U.S. and European economies. The U.S. entered a deep recession, with nearly 9 million jobs lost during 2008 and 2009, roughly 6% of the workforce. The number of jobs did not return to the December 2007 pre-crisis peak until May 2014.[3] U.S. household net worth declined by nearly $13 trillion (20%) from its Q2 2007 pre-crisis peak, recovering by Q4 2012.[4] U.S. housing prices fell nearly 30% on average and the U.S. stock market fell approximately 50% by early 2009, with stocks regaining their December 2007 level during September 2012.[5] One estimate of lost output and income from the crisis comes to "at least 40% of 2007 gross domestic product".[6] 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.[7] As of January 2018, U.S. bailout funds had been fully recovered by the government, when interest on loans is taken into consideration. A total of $626B was invested, loaned, or granted due to various bailout measures, while $390B had been returned to the Treasury. The Treasury had earned another $323B in interest on bailout loans, resulting in an $109B profit as of January 2021.[8]

Real gross domestic product (GDP) began contracting in the third quarter of 2008 and did not return to growth until Q1 2010. CBO estimated in February 2013 that real U.S. GDP remained 5.5% below its potential level, or about $850 billion. CBO projected that GDP would not return to its potential level until 2017.[326]

[325]

The unemployment rate rose from 5% in 2008 pre-crisis to 10% by late 2009, then steadily declined to 7.6% by March 2013. The number of unemployed rose from approximately 7 million in 2008 pre-crisis to 15 million by 2009, then declined to 12 million by early 2013.[328]

[327]

Residential private investment (mainly housing) fell from its 2006 pre-crisis peak of $800 billion, to $400 billion by mid-2009 and has remained depressed at that level. Non-residential investment (mainly business purchases of capital equipment) peaked at $1,700 billion in 2008 pre-crisis and fell to $1,300 billion in 2010, but by early 2013 had nearly recovered to this peak.

[329]

Housing prices fell approximately 30% on average from their mid-2006 peak to mid-2009 and remained at approximately that level as of March 2013.

[330]

Stock market prices, as measured by the S&P 500 index, fell 57% from their October 2007 peak of 1,565 to a trough of 676 in March 2009. Stock prices began a steady climb thereafter and returned to record levels by April 2013.

[331]

The net worth of U.S. households and non-profit organizations fell from a peak of approximately $67 trillion in 2007 to a trough of $52 trillion in 2009, a decline of $15 trillion or 22%. It began to recover thereafter and was $66 trillion by Q3 2012.

[332]

U.S. total national debt rose from 66% GDP in 2008 pre-crisis to over 103% by the end of 2012. Martin Wolf and Paul Krugman argued that the rise in private savings and decline in investment fueled a large private sector surplus, which drove sizable budget deficits.[334]

[333]

Lowered the target for the from 5.25% to 2%, and the discount rate from 5.75% to 2.25%. This took place in six steps occurring between September 18, 2007, and April 30, 2008;[361][362] In December 2008, the Fed further lowered the federal funds rate target to a range of 0–0.25% (25 basis points).[363]

Federal funds rate

Undertook, along with other central banks, to ensure member banks remain liquid. These are effectively short-term loans to member banks collateralized by government securities. Central banks have also lowered the interest rates (called the discount rate in the US) they charge member banks for short-term loans;[364]

open market operations

Created a variety of lending facilities to enable the Fed to lend directly to banks and non-bank institutions, against specific types of collateral of varying credit quality. These include the (TAF) and Term Asset-Backed Securities Loan Facility (TALF).[365]

Term Auction Facility

In November 2008, the Fed announced a $600 billion program to purchase the MBS of the GSE, to help lower mortgage rates.

[366]

In March 2009, the decided to increase the size of the Federal Reserve's balance sheet further by purchasing up to an additional $750 billion of government-sponsored enterprise mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities during 2009.[367]

Federal Open Market Committee

In popular culture[edit]

Several books written about the crisis were made into movies. Examples include The Big Short by Michael Lewis and Too Big to Fail by Andrew Ross Sorkin. The former tells the story from the perspective of several investors who bet against the housing market, while the latter follows key government and banking officials focusing on the critical events of September 2008, when many large financial institutions faced or experienced collapse.

The housing sector did not rebound, as was the case in prior recession recoveries, as the sector was severely damaged during the crisis. Millions of foreclosures had created a large surplus of properties and consumers were paying down their debts rather than purchasing homes.

Credit for borrowing and spending by individuals (or investing by corporations) was not readily available as banks paid down their debts.

Restrained government spending following initial stimulus efforts (i.e., austerity) was not sufficient to offset private sector weaknesses.

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(PDF) (Report). Financial Crisis Inquiry Commission. 2011.

The financial crisis inquiry report: final report of the National Commission on the causes of the financial crisis and economic crisis in the United States

Financial Crisis Inquiry Commission – Homepage

Report of Financial Crisis Inquiry Commission-January 2011

FCIC – Graphics Page

Archived December 9, 2015, at the Wayback Machine

Federal Reserve-Subprime Mortgage Crisis History Page

Federal Reserve-Timeline of the financial crisis

Reuters: – multimedia interactive charting the year of global change

Times of Crisis

PBS Frontline – Inside the Meltdown

PBS – What You Need to Know About the Crisis

. CNN. December 1, 2008. Archived from the original on December 16, 2008. Retrieved May 24, 2010.

"Government warned of mortgage meltdown Regulators ignored warnings about risky mortgages, delayed regulations on the industry"

. BBC. November 21, 2007.

"The US sub-prime crisis in graphics"

CNN Scorecard of Bailout Funds at

CNN Bailout Allocations & Payments

Video of lecture given by Marshall Carter, chairman of the New York Stock Exchange, at Boston University, April 15, 2009

The Economic Crisis: Its Origins and the Way Forward

Home Ownership, the Subprime Lending Crisis, and Financial Instability by Masum Momaya – International Museum of Women

The True American Dream

"Chairman Ben Bernanke Lecture Series Part 1"