The United States subprime mortgage crisis was a multinational financial crisis that occurred between 2007 and 2010 that contributed to the 2007–2008 global financial crisis and the Great Recession. It was triggered by a large decline in US home prices after the collapse of a housing bubble, leading to mortgage delinquencies, 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 bonds, along with attractive risk ratings from rating agencies. While elements of the crisis first became more visible during 2007, several major financial institutions such as Lehman Brothers and Merrill Lynch collapsed in September 2008 along with a liquidity crisis of American International Group (AIG), all primarily due to exposure to those packaged subprime loans and credit default swaps issued to insure these loans and their issuers, securities backed with mortgages, including subprime mortgages, widely held by financial firms globally, lost most of their value.
This resulted in several bank failures in Europe and sharp reductions in the value of stocks and commodities worldwide. The failure of banks in Iceland resulted in a devaluation of the Icelandic króna and threatened the government with bankruptcy. Iceland obtained an emergency loan from the International Monetary Fund in November. In the United States, 15 banks failed in 2008, while several others were rescued through government intervention or acquisitions by other banks.
The economic crisis caused countries to close their markets temporarily. On October 8, the Indonesian stock market halted trading, after a 10% drop in one day.
The Times of London reported that the meltdown was being called the Crash of 2008, and older traders were comparing it with Black Monday in 1987. The fall that week of 21% compared to a 28.3% fall 21 years earlier, but some traders were saying it was worse. "At least then it was a short, sharp, shock on one day. This has been relentless all week."
From October 6–10, 2008, the Dow Jones Industrial Average (DJIA or the Dow) fell over 1,874 points, or 18%, in its worst weekly decline ever on both a points and percentage basis. The S&P 500 fell more than 20%.
Having been suspended for three successive trading days (October 9, 10, and 13), the Icelandic stock market reopened on 14 October, with the main index, the OMX Iceland 15, closing at 678.4, which was about 77% lower than the 3,004.6 at the close on October 8. This reflected that the value of the three big banks, which had formed 73.2% of the value of the OMX Iceland 15, had been set to zero.
On October 24, 2008, many of the world's stock exchanges experienced the worst declines in their history, with drops of around 10% in most indices. The United States dollar and Japanese yen soared against other major currencies, particularly the British pound and Canadian dollar, as world investors sought safe havens.
By March 6, 2009 the Dow had dropped 54% to 6,469 from its peak of 14,164 on October 9, 2007, over a span of 17 months, before beginning to recover
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. Two proximate causes were the rise in subprime lending and the increase in housing speculation. The percentage of lower-quality subprime mortgages originated during a given year rose from the historical 8% or lower range to approximately 20% from 2004 to 2006, with much higher ratios in some parts of the U.S. A high percentage of these subprime mortgages, over 90% in 2006 for example, had a variable interest rate that increased over time (causing higher monthly mortgage payments). Housing speculation also increased, with the share of mortgage originations to investors (i.e. those owning homes as an investment other than primary residences) rising significantly from around 20% in 2000 to around 35% in 2006–2007. Investors, even those with prime credit ratings, were much more likely to default than non-investors/owner occupiers when housing 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 ratio of household debt to disposable personal income rose from 77% in 1990 to 127% by the end of 2007.
As a resault, global investors drastically reduced purchases of mortgage-backed debt and other securities as part of a decline in the capacity and willingness of the private financial system to support lending. Concerns about the soundness of U.S. credit and financial markets led to tightening credit around the world know as the credit crunch, and slowing economic growth in the U.S. and Europe.
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. U.S. household net worth declined by nearly $13 trillion (20%) from its Q2 2007 pre-crisis peak, recovering by Q4 2012. 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. One estimate of lost output and income from the crisis comes to "at least 40% of 2007 gross domestic product". 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. 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.
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