Money & Finance › Bubbles, crashes & crises › The 2008 global financial crisis
Subprime mortgages and the housing bubble
2003–2007· Crisis or event
Fact, law or dataA rule, statute, definition or measured number.
From about 2003 to 2007, lenders made millions of risky mortgages to weak borrowers, feeding a nationwide housing bubble.
See it on the Money & Finance map →How it works
Subprime loans went to borrowers with poor credit, often with low 'teaser' rates that reset higher after two years, little proof of income ('liar loans') or no down payment. Lenders sold the loans to Wall Street, which pooled them into bonds and CDOs that rating agencies stamped AAA, so the originators kept little risk. Subprime grew to about a fifth of new mortgages by 2006. When prices peaked that year and rates reset, defaults soared.
Why it matters
It turned the safest-seeming asset, the family home, into the trigger of the worst crisis since the 1930s, and led to today's ability-to-repay lending rules.
Think of it like
Like a leasing agent paid per lease signed, not per rent collected: volume rises, tenant quality falls, and someone else takes the losses.
Facts, rules and data
The Financial Crisis Inquiry Commission report (2011), Mortgage Bankers Association delinquency data, Case-Shiller price indexes, and lender lawsuits and settlements.
Debates and risks
How much blame goes to private lenders and Wall Street versus government housing goals, Fannie Mae and Freddie Mac, or low Fed rates remains politically contested.
Inside this (1)
Connections (4)
▸Alan Greenspan, Fed chair 1987–2006 is partly blamed for Subprime mortgages and the housing bubbleExperts disagree
The connection
After the dot-com bust and 9/11, the Greenspan Fed cut the federal funds rate to 1% by June 2003 and held it there a year. Cheap short-term money made adjustable-rate mortgages attractive. He also resisted tighter rules on mortgage lenders and derivatives, trusting lenders to police themselves.
When and why
Federal Reserve, 2001–2006; in October 2008 Greenspan told Congress he had found a 'flaw' in his belief that self-interest would protect lenders.
How solid is the link?
Rate history and his 2008 testimony are on record. Economist John Taylor argued rates were too low; Greenspan and Bernanke blamed global savings and lending practices.
Debates and risks
Economists disagree how much low rates, versus loose lending standards, foreign savings and weak regulation, inflated the bubble.
▸Subprime mortgages and the housing bubble helped inflate Home prices and the housing marketFact, law or data
The connection
Easy loans brought in millions of new buyers and let others buy bigger or speculate, all bidding for the same homes. National prices rose about 85% from 2000 to the 2006 peak on the Case-Shiller index, then fell about 27% by 2012 as defaults forced sales.
When and why
Nationwide, sharpest in California, Florida, Nevada and Arizona, where prices in some cities later fell by more than half.
How we know
Case-Shiller and FHFA price indexes; Atif Mian and Amir Sufi linked areas with the fastest subprime credit growth to the biggest booms and busts.
Debates and risks
Some research finds prime and middle-income borrowers, including investors, drove more of the boom than subprime loans; the balance is debated.
▸Subprime mortgages and the housing bubble triggered The 2008 global financial crisisFact, law or data
The connection
When home prices fell and teaser rates reset, subprime defaults soared, and the bonds and CDOs built from those loans collapsed in value. Because banks and funds worldwide held them with borrowed money, the losses, and uncertainty over who held them, spread panic far beyond housing.
When and why
From early 2007: New Century Financial failed in April, two Bear Stearns hedge funds in July, and BNP Paribas froze three funds in August.
How we know
The FCIC report traces the chain; mortgage delinquency data and bank write-downs track it month by month.
Debates and risks
Subprime losses, perhaps a few hundred billion dollars, were small next to the crisis; how leverage and runs magnified them is the core debate.
▸The 'global savings glut': trade surpluses recycled into US assets is blamed by some for fueling Subprime mortgages and the housing bubbleExperts disagree
The connection
The argument: foreign savings poured into US safe assets, pushing down long-term and mortgage rates, and demand for AAA-rated securities led Wall Street to manufacture them from subprime loans. Critics answer that Asian money mostly bought Treasuries and agency bonds, while European banks and lax US lending standards drove subprime securities.
When and why
United States, about 2002–2007, as the current-account deficit reached about 6% of GDP in 2006.
How solid is the link?
TIC data on foreign purchases; Bernanke, Bertaut, DeMarco and Kamin (2011) traced much private mortgage-bond buying to European investors.
Debates and risks
How to weigh foreign capital against Fed policy, weak regulation and borrower and lender behavior remains debated.