![]() The primary principle of economics came into play. ![]() And hence there were a bit too many houses on the market now. This is where the unplanned mess occurred. As planned, they sold the houses of the defaulters. The sub-prime borrowers started defaulting. Housing bubble of 2008 finally burstsĪnd then the inevitable happened. Several triple A-rated CDOs too were full of subprime lending. Background checks and financial strength of the borrower were ignored and this led to the practice of subprime lending.A practice which is seen in some other areas today, as reported by The Wall Street Journal.The blasphemous part is that these mortgages weren’t only a part of the CCC-rated CDOs which would indicate high risk. Driven by this problem and their greed, banks now started lending to borrowers with higher chances of defaulting. Things started going downhill when almost all creditworthy borrowers had taken a house. So where did it all turn upside down? Housing bubble about to burst Since it was backed by a safe asset like a house, the investors felt it was a high reward low-risk investment. The banks had found a way to make big money through CDOs as there was a frantic rush towards buying houses and hence there was a huge rise in the number of investors wanting to invest in CDOs. It did seem a win-win right? A rush for investments In case there was a default, the banks would sell the house and pay the investors through that. The investors of CDO would be paid as the borrower paid back the loan. Based on the creditworthiness of the borrowers. These CDOs were given a rating from AAA to CCC. These MBS were stacked together by investment banks to sell an investment instrument known as Collateralized Debt Obligation. They were a form of asset-backed securities and every MBS had a collection of diverse mortgages to diversify risk. They securitized mortgages and also came up with mortgage-backed securities (MBS). What happened nextīankers saw this opportunity and got to work. ![]() It was an asset that everyone valued and it was possible to purchase it without worrying about the cost of debt. With interest rates at an all-time low, Americans saw the perfect opportunity to purchase their own homes. Sure enough, it did start well with loans being taken by several individuals. They hoped that with low interest rates, debt would be cheap and that would also boost consumption in the economy. To boost up the economy, the Federal Reserve(Fed) lowered interest rates. There was widespread pain and consumption was at miserable levels. Following the tragic 9/11, the USA fell into recession. The origin of the crisis wasn’t in 2008 or 2007. Let’s revisit the crisis and understand what happened with the housing bubble of 2008. Yet there are number of people who don’t exactly know what happened. There was widespread panic, recession and it seemed the world would never be able to recover from it. It was regarded to be the greatest financial crisis since the 1929 depression. The 2008 financial crisis still brings back horrific memories for many.
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