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{{Short description|2007 mortgage crisis in the United States}}
[[File:Mortgage delinquencies by loan type (2000–2010).svg|thumb|upright=1.38|Mortgage delinquencies (missed payments) began rapidly rising from 2007.{{sfn|FCIC|2011|p=217}} A continuous buildup of [[toxic asset]]s in the form of [[subprime mortgages]] acted as a catalyst for the [[Great Recession in the United States]].]]
{{Subprime mortgage crisis sidebar}}

The American '''subprime mortgage crisis''' was a multinational [[financial crisis]] that occurred between 2007 and 2010, contributing to the [[2008 financial crisis]]. It led to a severe economic [[recession]], with millions becoming unemployed 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 [[foreclosure]]s and the devaluation of [[Mortgage-backed security|housing-related securities]]. The housing bubble preceding the crisis was financed with [[mortgage-backed securities]] (MBSes) and [[collateralized debt obligation]]s (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, [[Bankruptcy of Lehman Brothers|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.{{sfn|FCIC|2011}} Two [[proximate cause]]s 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 (finance)|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.<ref name="fred.stlouisfed.org">{{cite web |url=https://fred.stlouisfed.org/series/PAYEMS|title=All Employees: Total Nonfarm Payrolls |website=Federal Reserve Bank of St Louis |date=June 1, 2018}}</ref> U.S. household net worth declined by nearly $13 [[Trillion (short scale)|trillion]] (20%) from its Q2 2007 pre-crisis peak, recovering by Q4 2012.<ref name="https">{{cite web |url=https://fred.stlouisfed.org/series/TNWBSHNO|title=Households and Nonprofit Organizations; Net Worth, Level |website=Federal Reserve Bank of St Louis |date=June 7, 2018}}</ref> 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.<ref>{{cite web |url=https://fred.stlouisfed.org/series/SP500|title=S&P 500 |website=Federal Reserve Bank of St Louis |date=July 3, 2018}}</ref> One estimate of lost output and income from the crisis comes to "at least 40% of 2007 [[gross domestic product]]".<ref name=lessons>{{cite journal |last=Johnson |first=Simon |title=Three Unlearned Lessons From the Financial Crisis |journal=Bloomberg |date=September 26, 2013 |url=https://www.bloomberg.com/news/2013-09-26/three-unlearned-lessons-from-the-financial-crisis.html |access-date=November 17, 2013}}</ref> Europe also continued to struggle with [[European debt crisis|its own economic crisis]], with elevated unemployment and severe banking impairments estimated at €940 billion between 2008 and 2012.<ref>{{cite arXiv <!-- |ssrn=2294100 --> |title=Anatomy of a Bail-In |first1=Thomas |last1=Conlon |first2=John |last2=Cotter |date=March 26, 2014|class=q-fin.GN |eprint=1403.7628 }}</ref> 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.<ref name="projects.propublica.org">{{Cite web|url=https://projects.propublica.org/bailout/|title=Bailout Scorecard &#124; Eye on the Bailout &#124; ProPublica|website=projects.propublica.org|date=13 May 0202 }}</ref>

==Background and timeline of events==
{{Main|Subprime crisis background information|Subprime crisis impact timeline|2000s United States housing bubble|2000s United States housing market correction}}
[[File:Subprime mortgage originations, 1996-2008.GIF|thumb|[[Subprime mortage|Subprime mortgage]] lending jumped dramatically during the 2004–2006 period preceding the crisis.{{sfn|FCIC|2011|p=70}}|upright=1.6]]The immediate cause of the crisis was the bursting of the [[United States housing bubble]] which peaked in approximately 2006.<ref name="Moyers Morgenson">{{cite episode |title=Episode 06292007 |series=[[Bill Moyers Journal]] |network=[[PBS]] |transcript-url=https://www.pbs.org/moyers/journal/06292007/transcript5.html |transcript=Transcript June 29, 2007 |air-date=June 29, 2007}}</ref><ref name="WSJ Housing Bubble Burst">{{cite news |author=Justin Lahart |title=Egg Cracks Differ In Housing, Finance Shells |work=[[WSJ.com]] |publisher=Wall Street Journal |url=https://www.wsj.com/articles/SB119845906460548071?mod=googlenews_wsj |date=December 24, 2007 |access-date=July 13, 2008}}</ref> An increase in loan incentives such as easy initial terms and a long-term trend of rising housing prices had encouraged borrowers to assume risky mortgages in the anticipation that they would be able to quickly refinance at easier terms. However, once [[interest rate]]s began to rise and housing prices started to drop moderately in 2006–2007 in many parts of the U.S., borrowers were unable to refinance. [[default (finance)|Defaults]] and [[foreclosure]] activity increased dramatically as easy initial terms expired, home prices fell, and [[adjustable-rate mortgage]] (ARM) interest rates reset higher.

As housing prices fell, global investor demand for mortgage-related securities evaporated. This became apparent by July 2007, when investment bank [[Bear Stearns]] announced that two of its [[hedge fund]]s had imploded. These funds had invested in [[securities]] that derived their value from mortgages. When the value of these securities dropped, lenders demanded that these hedge funds provide additional collateral. This created a cascade of selling in these securities, which lowered their value further. Economist [[Mark Zandi]] wrote that this 2007 event was "arguably the proximate catalyst" for the financial market disruption that followed.<ref name="Zandi 2010">{{cite book |last=Zandi |first=Mark |year=2010 |title=Financial Shock |publisher=FT Press |isbn=978-0-13-701663-1 |url=https://archive.org/details/financialshockgl00zand }}</ref>{{rp|126}}

Several other factors set the stage for the rise and fall of housing prices, and related securities widely held by financial firms. In the years leading up to the crisis, the U.S. received large amounts of foreign money from fast-growing economies in Asia and oil-producing/exporting countries. This inflow of funds combined with low U.S. interest rates from 2002 to 2004 contributed to easy credit conditions, which fueled both [[economic bubble|housing and credit bubbles]]. Loans of various types (e.g., mortgage, credit card, and auto) were easy to obtain and consumers assumed an unprecedented debt load.<ref>{{cite web |url=http://www.federalreserve.gov/newsevents/speech/bernanke20090414a.htm |title=Bernanke-Four Questions About the Financial Crisis |publisher=Federalreserve.gov |date=April 14, 2009 |access-date=October 3, 2010}}</ref><ref>{{cite news |url=https://www.nytimes.com/2009/03/02/opinion/02krugman.html |title=Opinion – Revenge of the Glut |first=Paul |last=Krugman |date=March 1, 2009 |access-date=October 5, 2017 |newspaper=The New York Times }}</ref>

As part of the housing and credit booms, the number of financial agreements called [[mortgage-backed securities]] (MBS), which derive their value from mortgage payments and housing prices, greatly increased. Such [[financial innovation]] enabled institutions and investors around the world to invest in the U.S. housing market. As housing prices declined, major global financial institutions that had borrowed and invested heavily in MBS reported significant losses. Defaults and losses on other loan types also increased significantly as the crisis expanded from the housing market to other parts of the economy. Total losses were estimated in the trillions of U.S. dollars globally.<ref>{{cite web |url=http://www.imf.org/external/pubs/ft/weo/2009/01/pdf/exesum.pdf |title=IMF Loss Estimates |access-date=October 3, 2010}}</ref>

While the housing and credit bubbles were growing, a series of factors caused the financial system to become increasingly fragile. [[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]]. These entities were not subject to the same regulations as [[Banking|depository banking]]. Further, shadow banks were able to mask the extent of their risk taking from investors and regulators through the use of complex, off-balance sheet [[Derivative (finance)|derivatives]] and [[Securitization|securitizations]].<ref name="papers.ssrn">{{cite SSRN |author=Michael Simkovic |ssrn=1323190 |title=Secret Liens and the Financial Crisis of 2008 |year=2009}}</ref> Economist [[Gary Gorton]] has referred to the 2007–2008 aspects of the crisis as a "[[Bank run|run]]" on the shadow banking system.<ref name="frbatlanta.org">{{cite web |url=http://www.frbatlanta.org/news/CONFEREN/09fmc/gorton.pdf |title=Gary Gorton-NBER and Yale-Slapped in the Face by the Invisible Hand: Banking and the Panic of 2007, Updated May 2009 |access-date=October 5, 2017 |archive-date=June 20, 2014 |archive-url=https://web.archive.org/web/20140620164026/http://www.frbatlanta.org/news/CONFEREN/09fmc/gorton.pdf |url-status=dead }}</ref>

The complexity of these off-balance sheet arrangements and the securities held, as well as the interconnection between larger financial institutions, made it virtually impossible to re-organize them via bankruptcy, which contributed to the need for government bailouts.<ref name="papers.ssrn" /> Some experts believe these shadow institutions had become as important as commercial (depository) banks in providing credit to the U.S. economy, but they were not subject to the same regulations.<ref name="newyorkfed.org">{{cite web |url=http://www.newyorkfed.org/newsevents/speeches/2008/tfg080609.html |title=Geithner-Speech Reducing Systemic Risk in a Dynamic Financial System |publisher=Newyorkfed.org |date=June 9, 2008 |access-date=October 3, 2010}}</ref> These institutions as well as certain regulated banks had also assumed significant debt burdens while providing the loans described above and did not have a financial cushion sufficient to absorb large loan defaults or MBS losses.<ref>{{cite web |url=http://www.ft.com/cms/s/0/9c158a92-1a3c-11de-9f91-0000779fd2ac.html |title=Greenspan-We Need a Better Cushion Against Risk |publisher=Ft.com |date=March 26, 2009 |access-date=October 3, 2010}}</ref>

[[File:Federal funds rate history and recessions.jpg|thumb|right|[[Federal funds rate]] history and recessions|upright=1.6]]

The losses experienced by financial institutions on their mortgage-related securities impacted their ability to lend, slowing economic activity. Interbank lending dried-up initially and then loans to non-financial firms were affected. Concerns regarding the stability of key financial institutions drove central banks to take action to provide funds to encourage lending and to restore faith in the [[commercial paper]] markets, which are integral to funding business operations. Governments also [[Troubled Asset Relief Program|bailed out]] key financial institutions, assuming significant additional financial commitments.

The risks to the broader economy created by the housing market downturn and subsequent financial market crisis were primary factors in several decisions by [[central bank]]s around the world to cut interest rates and governments to implement economic stimulus packages. Effects on global stock markets due to the crisis were dramatic. Between January 1 and October 11, 2008, owners of stocks in U.S. corporations suffered about $8 trillion in losses, as their holdings declined in value from $20 trillion to $12 trillion. Losses in other countries averaged about 40%.<ref>''Wall Street Journal'' October 11, 2008, p. 1</ref>

Losses in the stock markets and housing value declines place further downward pressure on consumer spending, a key economic engine.<ref>{{cite news |url=https://www.nytimes.com/2008/11/16/opinion/16friedman.html |title=Opinion – Gonna Need a Bigger Boat |first=Thomas L. |last=Friedman |date=November 16, 2008 |access-date=October 5, 2017 |newspaper=The New York Times }}</ref> Leaders of the larger developed and emerging nations met in November 2008 and March 2009 to formulate strategies for addressing the crisis.<ref>{{cite news |url=https://www.bloomberg.com/index.html?Intro=intro3 |title=G-20 Calls for Action on Growth, Overhaul of Financial Rules |publisher=Bloomberg.com |access-date=February 27, 2009 |archive-url=https://web.archive.org/web/20070517104557/http://www.bloomberg.com/index.html?Intro=intro3 |archive-date=May 17, 2007 }}</ref> A variety of [[subprime mortgage crisis solutions debate|solutions]] were proposed by government officials, central bankers, economists, and business executives.<ref name="Stigliz Recommendations">{{cite news |url=http://www.cnn.com/2008/POLITICS/09/17/stiglitz.crisis/index.html |title=Stigliz Recommendations |work=CNN |date=September 17, 2008 |access-date=May 24, 2010}}</ref><ref>{{cite news |url=https://www.economist.com/finance/displayStory.cfm?story_id=12813430 |title=Greenspan-Banks Need More Capital |publisher=Economist.com |date=December 18, 2008 |access-date=February 27, 2009}}</ref><ref>{{cite web |url=http://www.ft.com/cms/s/0/85106daa-f140-11dd-8790-0000779fd2ac.html?nclick_check=1 |title=FT-Ferguson Beyond the Age of Leverage |publisher=Ft.com |date=February 2, 2009 |access-date=October 3, 2010}}</ref> In the U.S., the [[Dodd–Frank Wall Street Reform and Consumer Protection Act]] was signed into law in July 2010 to address some of the causes of the crisis.

==Causes==
{{Further|Causes of the Great Recession|Causes of the 2000s United States housing bubble}}

===Overview===
[[File:FCIC - Housing Bubbles in Multiple Countries 2002-2008.png|thumb|upright=1.6|right|Housing price appreciation in selected countries, 2002–2008]]
[[File:US Private Debt to GDP by Sector.png|thumb|upright=1.6|right|U.S. households and financial businesses significantly increased borrowing (leverage) in the years leading up to the crisis.]]

The crisis can be attributed to several factors, which emerged over a number of years. Causes proposed include the inability of homeowners to make their mortgage payments (due primarily to [[adjustable-rate mortgage]]s resetting, borrowers overextending, [[predatory lending]], and speculation), overbuilding during the boom period, risky mortgage products, increased power of mortgage originators, high personal and corporate debt levels, financial products that distributed and perhaps concealed the risk of mortgage default, monetary and housing policies that encouraged risk-taking and more debt, international [[Balance of trade|trade imbalances]], and inappropriate government regulation.<ref name="ssrn">Michael Simkovic, [https://ssrn.com/abstract=1924831 ''Competition and Crisis in Mortgage Securitization'']</ref><ref>{{cite news |first=Joseph |last=Stiglitz |url=http://www.cnn.com/2008/POLITICS/09/17/stiglitz.crisis/index.html |title=Time-Stiglitz |publisher=Cnn.com |date=September 17, 2008 |access-date=February 27, 2009}}</ref><ref>{{cite magazine |last=Steverman |first=Ben |url=http://www.businessweek.com/investor/content/oct2008/pi20081017_950382.htm?chan=top+news_top+news+index+-+temp_top+story |title=Business Week-The Financial Crisis Blame Game |magazine=Businessweek.com |date=October 18, 2008 |access-date=February 27, 2009 |archive-url=https://web.archive.org/web/20090417181606/http://www.businessweek.com/investor/content/oct2008/pi20081017_950382.htm?chan=top+news_top+news+index+-+temp_top+story |archive-date=April 17, 2009 }}</ref><ref>{{cite web |last=Roubini |first=Nouriel |url=https://foreignpolicy.com/story/cms.php?story_id=4591 |title=Roubini – More Doom Ahead |publisher=Foreignpolicy.com |year=2009 |access-date=February 27, 2009}}</ref><ref>{{cite conference |first=M. Jaffee |last=Dwight |title=The Role of GSEs and Housing Policy in the Financial Crisis |date=February 27, 2010 |url=http://www.fcic.gov/hearings/pdfs/2010-0227-Jaffee-ppt.pdf |publisher=Fcic.gov |access-date=November 20, 2012 |archive-url=https://web.archive.org/web/20101215053834/http://fcic.gov/hearings/pdfs/2010-0227-Jaffee-ppt.pdf |archive-date=December 15, 2010 }}</ref> Excessive consumer housing debt was in turn caused by the [[mortgage-backed security]], [[credit default swap]], and [[collateralized debt obligation]] sub-sectors of the [[finance industry]], which were offering irrationally low interest rates and irrationally high levels of approval to [[subprime mortgage]] consumers due in part to faulty [[Financial Models|financial models]].<ref>{{cite news |last=Salmon |first=Felix |title=Recipe for Disaster: The Formula That Killed Wall Street |url=https://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all |access-date=April 3, 2013 |newspaper=Wired |date=February 23, 2009}}</ref><ref>{{cite journal |first1=Catherine |last1=Donnelly |first2=Paul |last2=Embrechts |title=The devil is in the tails: actuarial mathematics and the subprime mortgage crisis |journal=ASTIN Bulletin |date=January 4, 2010 |volume=40 |issue=1 |pages=1–33 |url=http://www2.ims.nus.edu.sg/preprints/2010-5.pdf |access-date=April 3, 2013|doi=10.2143/AST.40.1.2049222 |hdl=20.500.11850/20517 |s2cid=14201831 }}{{dead link|date=May 2017 |bot=InternetArchiveBot |fix-attempted=yes }}</ref> Debt consumers were acting in their rational self-interest, because they were unable to audit the finance industry's opaque faulty risk pricing methodology.<ref>{{cite book |first1=Tomasz R. |last1=Bielecki |first2=Damiano |last2=Brigo |first3=Fédéric |last3=Patras |title=Credit Risk Frontiers: Subprime Crisis, Pricing and Hedging, CVA, MBS, Ratings, and Liquidity |url=https://archive.org/details/creditriskfronti00biel |url-access=limited |year=2011 |publisher=Wiley |pages=[https://archive.org/details/creditriskfronti00biel/page/n450 437]–56 |editor=Tomasz R. Bielecki |editor2=Christophette Blanchet-Scalliet |chapter=Chapter 13. Structural Counterparty Risk Valuation for Credit Default Swaps|doi=10.1002/9781118531839.ch13 |isbn=978-1-118-53183-9 }}</ref>

Among the important catalysts of the subprime crisis were the influx of money from the private sector, the banks entering into the mortgage bond market, government policies aimed at expanding homeownership, speculation by many home buyers, and the predatory lending practices of the mortgage lenders, specifically the adjustable-rate mortgage, [[Subprime lending|2–28 loan]], that mortgage lenders sold directly or indirectly via mortgage brokers.<ref name="The downturn in facts and figures">{{cite news |url=http://news.bbc.co.uk/2/hi/business/7073131.stm |title=The downturn in facts and figures; |publisher=BBC |date=November 21, 2007 |access-date=February 18, 2009}}</ref><ref>Ramlall, I., ''The Impact of the Subprime Crisis on Global Financial Markets, Banks and'' ([[Newcastle upon Tyne]]: Cambridge Scholars Publishing, 2013), [https://books.google.com/books?id=gS9QBwAAQBAJ&pg=PA5&redir_esc=y#v=onepage&q&f=false pp. 5–31].</ref>{{rp|5–31}} On Wall Street and in the financial industry, [[moral hazard]] lay at the core of many of the causes.<ref name="brown1">{{cite web |url=http://www.marketwatch.com/news/story/story.aspx?guid={9F4C2252-8BA7-459C-B34E-407DB32921C1}&siteid=rss |last=Brown |first=Bill |title=Uncle Sam as sugar daddy; MarketWatch Commentary: The moral hazard problem must not be ignored |website=MarketWatch |date=November 19, 2008 |access-date=November 30, 2008}}</ref>

In its "Declaration of the Summit on Financial Markets and the World Economy," dated November 15, 2008, leaders of the [[Group of 20]] cited the following causes:

{{quote|During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions.<ref>{{cite web |url=https://georgewbush-whitehouse.archives.gov/news/releases/2008/11/20081115-1.html |title=Declaration of G20 |date=2008-11-15 |via=[[NARA|National Archives]] |work=[[whitehouse.gov]] |access-date=2009-02-27}}</ref>}}

Federal Reserve Chair [[Ben Bernanke]] testified in September 2010 regarding the causes of the crisis. He wrote that there were shocks or triggers (i.e., particular events that touched off the crisis) and vulnerabilities (i.e., structural weaknesses in the financial system, regulation and supervision) that amplified the shocks. Examples of triggers included: losses on subprime mortgage securities that began in 2007 and a [[bank run|run]] on the [[shadow banking system]] that began in mid-2007, which adversely affected the functioning of [[money market]]s. 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 (finance)|leverage]] (borrowing to invest); and inappropriate usage of [[Derivative (finance)|derivatives]] as a tool for taking excessive risks. Examples of vulnerabilities in the ''public'' sector included: statutory gaps and conflicts between regulators; ineffective use of regulatory authority; and ineffective crisis management capabilities. Bernanke also discussed "[[Too big to fail]]" institutions, [[monetary policy]], and [[trade deficits]].<ref name="BernankeFCIC1">{{cite web |url=http://www.federalreserve.gov/newsevents/testimony/bernanke20100902a.htm |title=Bernanke-Causes of the Recent Financial and Economic Crisis |publisher=Federalreserve.gov |date=September 2, 2010 |access-date=May 31, 2013}}</ref>

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. These assumptions included: 1) Housing prices would not fall dramatically;<ref name="c-span.org">{{cite web |url=http://www.c-span.org/Watch/Media/2010/06/02/HP/R/33689/Financial+Crisis+Inquiry+Commission.aspx |title=Financial Crisis Inquiry Commission-Warren Buffett Testimony-June 2, 2010 |publisher=C-span.org |date=June 2, 2010 |access-date=October 3, 2010 |archive-date=June 6, 2010 |archive-url=https://web.archive.org/web/20100606120646/http://www.c-span.org/Watch/Media/2010/06/02/HP/R/33689/Financial+Crisis+Inquiry+Commission.aspx |url-status=dead }}</ref> 2) Free and open [[financial market]]s supported by sophisticated [[financial engineering]] would most effectively support market efficiency and stability, directing funds to the most profitable and productive uses; 3) Concepts embedded in mathematics and physics could be directly adapted to markets, in the form of various financial models used to evaluate [[credit risk]]; 4) Economic imbalances, such as large trade deficits and low savings rates indicative of over-consumption, were sustainable; and 5) Stronger regulation of the [[shadow banking system]] and [[derivatives market]]s was not needed.<ref>{{cite journal |first=Paul |last=Volcker |url=http://www.nybooks.com/articles/archives/2010/jun/24/time-we-have-growing-short/ |title=The Time We Have Is Growing Short |journal=The New York Review of Books |date=May 2010 |volume=57 |issue=11 |access-date=October 3, 2010}}</ref> Economists surveyed by the [[University of Chicago]] during 2017 rated the factors that caused the crisis in order of importance: 1) Flawed financial sector regulation and supervision; 2) Underestimating risks in financial engineering (e.g., CDOs); 3) Mortgage fraud and bad incentives; 4) Short-term funding decisions and corresponding runs in those markets (e.g., repo); and 5) Credit rating agency failures.<ref>[http://www.igmchicago.org/surveys-special/factors-contributing-to-the-2008-global-financial-crisis? IGM Forum-Factors Contributing to 2008 Global Financial Crisis-October 17, 2017]</ref>

The real estate bubble was initially fueled by a global pool of reserves valued at approximately U.S.$70 trillion. A significant portion of these reserves was utilized by investment banks to purchase securities like mortgage-backed securities (MBSes). MBSes, for example, are derivatives where the issuing banks would secure loans from commercial banks to finance home purchases. To refinance these loans, the banks would seek funding, often drawing on savings from their clients. 
MBSes, tied to the real estate sector, became highly attractive financial assets during the housing boom. Both individual investors and financial institutions largely ignored the risks associated with these securities. Their value rose steadily, creating a perception of security and profitability. However, when the housing market faltered, the value of MBSes plummeted, leading to significant financial losses and a cascading crisis.  
This misjudgment of risk, combined with excessive reliance on credit and financial engineering, created the conditions for the eventual collapse, illustrating the vulnerabilities of a system heavily dependent on inflated asset values.
Another critical factor in the subprime mortgage crisis was the precarious financial position of major investment banks. The ratio of their leverage ratios was alarmingly low, in some cases reaching 1:40. This meant that for every dollar of equity, these banks owed $40.<ref>{{cite book |last1=Russo |first1=Thomas A. |last2=Aaron J. |first2=Katzel |title=The 2008 Financial Crisis and Its Aftermath: Addressing the Next Debt Challenge |date=2011 |publisher=Group of Thirty |location=Washington, D.C. |page=22 |edition=Occasional Paper 82 |url=https://group30.org/images/uploads/publications/G30_2008FinancialCrisisAftermathDebtChallenge.pdf |access-date=18 March 2025 |language=English |format=pdf |quote=As observed in January 2011 by the U.S. Financial Crisis Inquiry Commission, “[f]rom 1978 to 2007, the amount of debt held by the financial sector soared from $3 trillion to $36 trillion, more than doubling as a share of gross domestic product.… In the years leading up to the crisis, too many financial institutions…borrowed to the hilt, leaving them vulnerable to financial distress or ruin if the value of their investments declined even modestly. For example, as of 2007, the five major investment banks—Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley—were operating with extraordinarily thin capital. By one measure, their leverage ratios were as high as 40 to 1…. To make matters worse, much of their borrowing was short-term, in the overnight market—meaning the borrowing had to be renewed each and every day.”}}</ref> Such extreme leverage made them highly vulnerable to even minor fluctuations in asset values.  
These investment banks poured significant resources into MBSes, gambling heavily on the assumption that real estate prices would continue to rise indefinitely. Commercial banks, in turn, loaned substantial sums to individuals and to investment banks involved in issuing these risky MBSes. However, the investment banks failed to properly assess the future value of these financial assets. It was not just a matter of credit expansion but also of widespread overconfidence and naivety—individuals and institutions alike were convinced that the housing bubble would persist.  
The situation was exacerbated by the deregulation of over-the-counter (OTC) derivatives markets.<ref>{{cite book |last1=Russo |first1=Thomas A. |last2=Katzel |first2=Aaron J. |title=The 2008 Financial Crisis and Its Aftermath: Addressing the Next Debt Challenge |date=2011 |publisher=Group of Thirty |location=Washington, D.C. |page=24 |url=https://group30.org/images/uploads/publications/G30_2008FinancialCrisisAftermathDebtChallenge.pdf |access-date=18 March 2025 |format=pdf |quote=[...] Congress’s decision to exempt over-the-counter derivatives from regulation allowed for the rapid growth of a product that played a critical role in the crisis by magnifying the risks presented by mortgage-backed securities, while increasing the interconnectedness of financial institutions and decreasing transparency. As noted by the Financial Crisis Inquiry Commission, the “enactment of legislation in 2000 to ban the regulation by both the federal and state governments of over-the-counter (OTC) derivatives was a key turning point in the march toward the financial crisis.… [W]ithout any oversight, OTC derivatives rapidly spiraled out of control and out of sight, growing to $673 trillion in notional amount.… They amplified the losses from the collapse of the housing bubble by allowing multiple bets on the same securities and spread them throughout the financial system.… [T]he existence of millions of derivative contracts of all types between systemically important financial institutions—unseen and unknown in this unregulated market—added to the uncertainty and escalated panic, helping to precipitate government assistance to those institutions.”}}</ref> These markets allowed for the creation and trade of complex financial derivatives, many of which were tied to the real estate sector and, in some cases, to foreign exchange markets. These derivatives often lacked transparency and their behavior was poorly predicted, yet their trade still proliferated in the unregulated OTC markets. 
The sheer volume of derivatives became staggering, with their total value exceeding the global GDP by more than tenfold. Many of these derivatives were backed by high-risk assets like MBSes and CDOs, further compounding the instability of the financial system.  

The unregulated creation and trade of derivatives, combined with excessive leverage and misplaced confidence in the housing market, were equally significant contributors. These factors created a fragile financial structure that was doomed to collapse once the bubble burst.
Before the subprime crisis, an excessive number of houses were constructed, and resources were disproportionately allocated to the real estate sector. Investment banks issued MBS at unprecedented levels, fueled by the housing boom. Meanwhile, many non-financial corporations prioritized stock buybacks, dividend payments, and speculative investments over reinvesting in productive capital and expanding employment. In some cases, these corporations even incurred debt to finance these financial maneuvers, further diverting resources away from productive sectors.  

The globalized nature of the modern economy amplifies the effects of crises. When major economies like the U.S. or China experience downturns, the impact spreads worldwide, leading to business defaults, rising unemployment, and economic contraction. Compounding this is the phenomenon of financialization, where banks and non-financial corporations prioritize investments in financial instruments like stocks, derivatives, and bonds over productive investments. 

A significant portion of the funds used to finance MBSes and other home purchases originated from global savings, not solely from central bank credit expansion. These savings (which amounted to U.S.$70 trillion in total worldwide liquidity) came not just from within the United States but from international sources as well, like China and other Asian developing economies.<ref>{{cite book |last1=Russo |first1=Thomas A. |last2=Katzel |first2=Aaron J. |title=The 2008 Financial Crisis and Its Aftermath: Addressing the Next Debt Challenge |date=2011 |publisher=Group of Thirty |location=Washington, D.C. |page=13 |edition=Occasional Paper 82 |url=https://group30.org/images/uploads/publications/G30_2008FinancialCrisisAftermathDebtChallenge.pdf |access-date=18 March 2025 |format=pdf |quote=The real estate bubble was supported by an enormous glut in worldwide liquidity, estimated to consist of approximately $70 trillion in investible funds by 2007.26 The product of the significant increase in global wealth following World War II and the rapid growth of the economies of emerging markets and commodity producers following the 1997 Asian crisis,27 much of this $70 trillion in investible assets was held by institutions seeking “low risk” investments that could provide returns in excess of U.S. Treasuries.28 Although this enormous amount of capital also contributed to stock price inflation,29 highly rated mortgage-backed securities, which were granted favorable capital treatment under international bank regulations, proved to be an extremely attractive place to invest this “Giant Pool of Money.”}}</ref>  

This shift in economic focus led to a decrease in the production of both capital and consumer goods in Western economies. Outsourcing and risky financial strategies further exacerbated this trend. Credit expansion primarily benefited the real estate sector, leaving other productive parts of the economy underfunded. 


The U.S. [[Financial Crisis Inquiry Commission]] reported its findings in January 2011. It concluded that "the crisis was avoidable and was caused by: Widespread failures in financial regulation, including the Federal Reserve's failure to stem the tide of toxic mortgages; Dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk; An explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis; Key policy makers ill prepared for the crisis, lacking a full understanding of the financial system they oversaw; and systemic breaches in accountability and ethics at all levels."<ref>{{Cite web|url=http://www.fcic.gov/files/news_pdfs/2011-0127-fcic-releases-report.pdf|archive-url=https://web.archive.org/web/20110130170725/http://www.fcic.gov/files/news_pdfs/2011-0127-fcic-releases-report.pdf|title=Financial Crisis Inquiry Commission-Press Release-January 27, 2011|archive-date=January 30, 2011}}</ref>

===Narratives===
[[File:U.S. Fixed Investment as Pct GDP.png|thumb|right|upright=1.6|U.S. residential and non-residential investment fell relative to GDP during the crisis.]]
There are several "narratives" attempting to place the causes of the crisis into context, with overlapping elements. Five such narratives include:
#There was the equivalent of a [[bank run]] on the [[shadow banking system]], which includes [[investment banks]] and other non-depository financial entities. This system had grown to rival the depository system in scale yet was not subject to the same regulatory safeguards.<ref name="frbatlanta.org"/><ref name="KrugmanGeithner1">{{cite journal |url=http://www.nybooks.com/articles/2014/07/10/geithner-does-he-pass-test/ |title=Does He Pass the Test? |journal=The New York Review of Books |first=Paul |last=Krugman |date=July 10, 2014 |volume=61 |issue=12 |access-date=October 5, 2017 |via=www.nybooks.com}}</ref>
#The economy was being driven by a housing bubble. When it burst, private residential investment (i.e., housing construction) fell by nearly 4% GDP and consumption enabled by bubble-generated housing wealth also slowed. This created a gap in annual demand (GDP) of nearly $1 trillion. Government was unwilling to make up for this private sector shortfall.<ref>{{cite web |url=http://www.cepr.net/index.php/blogs/beat-the-press/robert-samuelson-wants-people-to-be-unemployed-the-economics-of-the-economics-of-the-great-recession |title=Robert Samuelson Wants People to Be Unemployed: The Economics of the Economics of the Great Recession |first=Dean |last=Baker |access-date=October 5, 2017 |archive-date=April 2, 2015 |archive-url=https://web.archive.org/web/20150402094309/http://www.cepr.net/index.php/blogs/beat-the-press/robert-samuelson-wants-people-to-be-unemployed-the-economics-of-the-economics-of-the-great-recession |url-status=dead }}</ref><ref>{{cite web |url=https://krugman.blogs.nytimes.com/2014/07/01/learned-macroeconomic-helplessness/?module=BlogPost-Title&version=Blog+Main&contentCollection=Opinion&action=Click&pgtype=Blogs&region=Body |title=Learned Macroeconomic Helplessness |access-date=October 5, 2017|date=July 2014 }}</ref>
#Record levels of [[household debt]] accumulated in the decades preceding the crisis resulted in a [[balance sheet recession]] (similar to [[debt deflation]]) once housing prices began falling in 2006. Consumers began paying down debt, which reduces their consumption, slowing down the economy for an extended period while debt levels are reduced.<ref name="Mian and Sufi2014">{{cite book |last=Mian, Atif and |first=Sufi, Amir |year=2014 |title=House of Debt |publisher=University of Chicago |isbn=978-0-226-08194-6|title-link=House of Debt }}</ref><ref name="KrugmanGeithner1"/>
#Housing speculation using high levels of mortgage debt drove many investors with prime-quality mortgages (i.e., those investors in the middle of the credit score distribution) to default and enter foreclosure on investment properties when housing prices fell; the blame on "subprime" homeowners (i.e., those at the bottom of the credit score distribution) was overstated.<ref name="NBER23740"/><ref name="Quartz1">{{cite web |url=https://qz.com/1064061/house-flippers-triggered-the-us-housing-market-crash-not-poor-subprime-borrowers-a-new-study-shows/ |title=House flippers triggered the US housing market crash, not poor subprime borrowers |first=Gwynn |last=Guilford |date=29 August 2017 |access-date=October 5, 2017}}</ref>
#Government policies that encouraged home ownership even for those who could not afford it, contributing to lax lending standards, unsustainable housing price increases, and indebtedness.<ref name="Sowell 2009">{{cite book |last=Sowell |first=Thomas |author-link=Thomas Sowell |year=2009 |title=The Housing Boom and Bust |publisher=Basic Books |pages=57–58 |isbn=978-0-465-01880-2|title-link=The Housing Boom and Bust }}</ref>

Underlying narratives #1-3 is a hypothesis that growing [[Income inequality in the United States|income inequality]] and [[Household income in the United States|wage stagnation]] encouraged families to increase their [[household debt]] to maintain their desired living standard, fueling the bubble. Further, this greater share of income flowing to the top increased the political power of business interests, who used that power to [[deregulate]] or limit regulation of the shadow banking system.<ref>{{cite web |url=http://www.american.edu/cas/economics/pdf/upload/2012-1.pdf |title=Jon Wisman-Wage Stagnation, Rising Inequality and the Crisis of 2008-Retrieved June 2015 |access-date=October 5, 2017}}</ref><ref>{{cite web |url=http://www.imf.org/external/pubs/ft/wp/2010/wp10268.pdf |title=IMF-Inequality, Leverage and Crises-Kumhoff and Ranciere-November 2010 |access-date=October 5, 2017}}</ref><ref>{{cite web |url=http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_251-300/WP282.pdf |title=Stockhammer-Rising Inequality as a Cause of the Present Crisis-Amherst PERI-April 2012 |access-date=October 5, 2017}}</ref>

===Housing market===
====Boom and bust====
{{Main|United States housing bubble|United States housing market correction}}
[[File:U.S. Household Debt Relative to Disposable Income and GDP.png|thumb|upright=1.6|[[Household debt]] relative to [[disposable income]] and [[GDP]]]]According to [[Robert J. Shiller]] and other economists, housing price increases beyond the general inflation rate are not sustainable in the long term. From the end of World War II to the beginning of the housing bubble in 1997, housing prices in the US remained relatively stable.<ref>Shiller, R. J., ''Irrational Exuberance: Revised and Expanded Third Edition'' ([[Princeton, New Jersey|Princeton]] and [[Oxford]]: [[Princeton University Press]], 2015), [https://books.google.com/books?id=_2-YDwAAQBAJ&pg=PA19 19–21].</ref>{{rp|19–21}} The bubble was characterized by higher rates of household debt and lower savings rates, slightly higher rates of home ownership, and of course higher housing prices. It was fueled by low interest rates and large inflows of foreign funds that created easy credit conditions.<ref>{{cite news |url=https://www.nytimes.com/2008/09/24/business/economy/24text-bush.html?_r=2&pagewanted=1&oref=slogin |title=President Bush's Address to Nation |work=The New York Times |date=September 24, 2008 |access-date=May 24, 2010}}</ref>

Between 1997 and 2006 (the peak of the housing bubble), the price of the typical American house increased by 124%.<ref>{{cite news |title=CSI: credit crunch |publisher=Economist.com |url=https://www.economist.com/specialreports/displaystory.cfm?story_id=9972489 |access-date=May 19, 2008 |date=October 18, 2007}}</ref> Many research articles confirmed the timeline of the U.S. housing bubble (emerged in 2002 and collapsed in 2006–2007) before the collapse of the subprime mortgage industry.<ref>{{Cite journal|last1=Fabozzi|first1=Frank J.|last2=Xiao|first2=Keli|date=2019|title=The Timeline Estimation of Bubbles: The Case of Real Estate|url=https://onlinelibrary.wiley.com/doi/abs/10.1111/1540-6229.12246|journal=Real Estate Economics|language=en|volume=47|issue=2|pages=564–594|doi=10.1111/1540-6229.12246|s2cid=158688596|issn=1540-6229|url-access=subscription}}</ref><ref>{{Cite journal|last1=Phillips|first1=Peter C. B.|last2=Yu|first2=Jun|date=2011|title=Dating the timeline of financial bubbles during the subprime crisis|journal=Quantitative Economics|language=en|volume=2|issue=3|pages=455–491|doi=10.3982/QE82|issn=1759-7331|doi-access=free|hdl=10419/150327|hdl-access=free}}</ref> From 1980 to 2001, the ratio of median home prices to median household income (a measure of ability to buy a house) fluctuated from 2.9 to 3.1. In 2004 it rose to 4.0, and by 2006 it hit 4.6.<ref name="businessweek1">{{cite web |url=http://www.businessweek.com/stories/2008-10-18/the-financial-crisis-blame-gamebusinessweek-business-news-stock-market-and-financial-advice |archive-url=https://web.archive.org/web/20120626214949/http://www.businessweek.com/stories/2008-10-18/the-financial-crisis-blame-gamebusinessweek-business-news-stock-market-and-financial-advice |archive-date=June 26, 2012 |title=The Financial Crisis Blame Game |work=BusinessWeek |publisher=Businessweek.com |first1=Ben |last1=Steverman |first2=David |last2=Bogoslaw |date=October 18, 2008 |access-date=October 24, 2008}}</ref> The housing bubble was more pronounced in coastal areas where the ability to build new housing was restricted by geography or land use restrictions.<ref>{{cite news |url=https://www.nytimes.com/2005/08/08/opinion/that-hissing-sound.html |title=That Hissing Sound |first=Paul |last=Krugman |date=August 8, 2005 |access-date=October 5, 2017 |newspaper=The New York Times }}</ref> This [[housing bubble]] resulted in quite a few homeowners [[refinancing]] their homes at lower interest rates, or financing consumer spending by taking out [[second mortgage]]s secured by the price appreciation. US [[household debt]] as a percentage of annual [[disposable personal income]] was 127% at the end of 2007, versus 77% in 1990.<ref name="The End of the Affair">{{cite news |url=https://www.economist.com/world/unitedstates/displaystory.cfm?story_id=12637090 |title=The End of the Affair |newspaper=The Economist |date=October 30, 2008 |access-date=February 27, 2009}}</ref><ref>[https://www.nytimes.com/2010/12/13/opinion/13krugman.html NYT-Krugman-Block those Economic Metaphors], December 12, 2010</ref>

While housing prices were increasing, consumers were saving less<ref>{{cite web |url=https://www.bea.gov/briefrm/saving.htm |title=Bureau of Economic Analysis – Personal Savings Chart |publisher=Bea.gov |date=January 30, 2009 |access-date=February 27, 2009 |archive-url=https://web.archive.org/web/20071217193831/http://www.bea.gov/briefrm/saving.htm |archive-date=December 17, 2007 }}</ref> and both borrowing and spending more. Household debt grew from $705 billion in 1974, 60% of disposable personal income, to $7.4 trillion at the end of 2000, and finally to $14.5 trillion in the middle of 2008, 134% of disposable personal income.<ref>[http://www.federalreserve.gov/releases/z1/Current/data.htm Z.1 Historical Tables (1974)] {{Webarchive|url=https://web.archive.org/web/20120610011042/http://www.federalreserve.gov/releases/z1/Current/data.htm |date=2012-06-10 }} and [http://www.federalreserve.gov/releases/z1/Current/z1r-5.pdf current Z.1 release (2008)] {{webarchive|url=https://web.archive.org/web/20140811102013/http://www.federalreserve.gov/releases/z1/current/z1r-5.pdf |date=August 11, 2014 }}, Table B.100, lines 31,48.</ref> During 2008, the typical US household had 13 credit cards, with 40% of households carrying a balance, up from 6% in 1970.<ref>{{cite web |url=http://www.newsweek.com/id/163449 |title=Zakaria: A More Disciplined America &#124; Newsweek Business &#124; Newsweek.com |publisher=Newsweek.com |year=2008 |access-date=October 24, 2008}}</ref>

Free cash used by consumers from home equity extraction doubled from $627 billion in 2001 to $1,428 billion in 2005 as the housing bubble built, a total of nearly $5 trillion over the period.<ref>{{cite web |url=http://www.federalreserve.gov/pubs/feds/2007/200720/200720pap.pdf |title=Sources and Uses of Equity Extracted from Homes |year=2007 |access-date=October 3, 2010}}</ref><ref>{{cite web |url=http://seekingalpha.com/article/33336-home-equity-extraction-the-real-cost-of-free-cash |title=Equity extraction – Charts |publisher=Seekingalpha.com |date=April 25, 2007 |access-date=October 3, 2010}}</ref><ref>{{cite news |url=https://www.reuters.com/article/ousiv/idUSN2330071920070423 |title=Reuters-Spending Boosted by Home Equity Loans |publisher=Reuters.com |date=April 23, 2007 |access-date=October 3, 2010}}</ref> U.S. home mortgage debt relative to GDP increased from an average of 46% during the 1990s to 73% during 2008, reaching $10.5 (~${{Format price|{{Inflation|index=US-GDP|value=10500000000000|start_year=2008}}}} in {{Inflation/year|US-GDP}}) trillion.<ref>{{cite news |last=Barr |first=Colin |url=https://money.cnn.com/2009/05/27/news/mortgage.overhang.fortune/index.htm |title=Fortune-The $4 trillion housing headache |publisher=Money.cnn.com |date=May 27, 2009 |access-date=October 3, 2010}}</ref> From 2001 to 2007, U.S. mortgage debt almost doubled, and the amount of mortgage debt per household rose more than 63%, from $91,500 to $149,500, with essentially stagnant wages.{{sfn|FCIC|2011}} Economist [[Tyler Cowen]] explained that the economy was highly dependent on this home equity extraction: "In the 1993–1997 period, home owners extracted an amount of equity from their homes equivalent to 2.3% to 3.8% GDP. By 2005, this figure had increased to 11.5% GDP."<ref name="TCowen2011">{{cite book |last=Cowen |first=Tyler |year=2011 |title=The Great Stagnation |publisher=Dutton |isbn=978-0-525-95271-8|title-link=The Great Stagnation }}</ref>

This credit and house price explosion led to a building boom and eventually to a surplus of unsold homes, which caused U.S. housing prices to peak and begin declining in mid-2006.<ref>{{cite web |url=http://www2.standardandpoors.com/spf/pdf/index/CSHomePrice_Release_123062.pdf |title=Case Shiller Housing Price Index |date=December 2008 |access-date=October 3, 2010}}</ref> Easy credit, and a belief that house prices would continue to appreciate, had encouraged many subprime borrowers to obtain [[adjustable-rate mortgage]]s. These mortgages enticed borrowers with a below market interest rate for some predetermined period, followed by market interest rates for the remainder of the mortgage's term.

The US home ownership rate increased from 64% in 1994 (about where it had been since 1980) to an all-time high of 69.2% in 2004.<ref>{{cite news |title=CENSUS BUREAU REPORTS ON RESIDENTIAL VACANCIES AND HOMEOWNERSHIP |date=October 26, 2007 |publisher=U.S. Census Bureau |url=https://www.census.gov/hhes/www/housing/hvs/qtr307/q307press.pdf |archive-url=https://web.archive.org/web/20080216030156/http://www.census.gov/hhes/www/housing/hvs/qtr307/q307press.pdf |archive-date=February 16, 2008}}</ref> Subprime lending was a major contributor to this increase in home ownership rates and in the overall demand for housing, which drove prices higher.

[[File:Subprime crisis - Foreclosures & Bank Instability.png|thumb|upright=1.6|Vicious cycles in the housing and financial markets]]

Borrowers who would not be able to make the higher payments once the initial grace period ended, were planning to refinance their mortgages after a year or two of appreciation. As a result of the depreciating housing prices, borrowers' ability to refinance became more difficult. Borrowers who found themselves unable to escape higher monthly payments by refinancing began to default.

As more borrowers stopped making their mortgage payments, foreclosures and the supply of homes for sale increased. This placed downward pressure on housing prices, which further lowered homeowners' [[Negative equity|equity]]. The decline in mortgage payments also reduced the value of mortgage-backed securities, which eroded the net worth and financial health of banks. This [[vicious cycle]] was at the heart of the crisis.<ref>{{cite news |last=Feldstein |first=Martin |url=https://www.wsj.com/articles/SB122697004441035727 |title=NYT – How to Help People Whose Homes are Underwater |publisher=Online.wsj.com |date=November 18, 2008 |access-date=February 27, 2009}}</ref>

By September 2008, average U.S. housing prices had declined by over 20% from their mid-2006 peak.<ref>{{cite web |url=http://www2.standardandpoors.com/spf/pdf/index/CSHomePrice_Release_112555.pdf |title=The McGraw-Hill Companies |publisher=Standardandpoors.com |access-date=November 18, 2012}}</ref><ref>{{cite news |url=https://www.economist.com/finance/displaystory.cfm?story_id=12470547 |title=Economist-A Helping Hand to Homeowners |publisher=Economist.com |date=October 23, 2008 |access-date=February 27, 2009}}</ref> This major and unexpected decline in house prices means that many borrowers have zero or [[negative equity]] in their homes, meaning their homes were worth less than their mortgages. As of March 2008, an estimated 8.8 million borrowers – 10.8% of all homeowners – had negative equity in their homes, a number that is believed to have risen to 12 million by November 2008. By September 2010, 23% of all U.S. homes were worth less than the mortgage loan.<ref name="wellsfargo.com">{{Cite web|url=https://www.wellsfargo.com/downloads/pdf/com/research/economic_commentary/efc09172010.pdf|title=Wells Fargo Economic Research-Weekly Economic and Financial Commentary-September 17, 2010}}{{Dead link|date=August 2021 |bot=InternetArchiveBot |fix-attempted=yes }}</ref>

Borrowers in this situation have an incentive to default on their mortgages as a mortgage is typically [[nonrecourse debt]] secured against the property.<ref>{{cite news |url=https://www.nytimes.com/2008/02/22/business/22homes.html |title=Negative Equity |work=The New York Times |first1=Edmund L. |last1=Andrews |author-link1=Edmund Andrews (reporter) |first2=Louis |last2=Uchitelle |author-link2=Louis Uchitelle |date=February 22, 2008 |access-date=May 24, 2010}}</ref> Economist Stan Leibowitz argued in the ''[[Wall Street Journal]]'' that although only 12% of homes had negative equity, they comprised 47% of [[foreclosure]]s during the second half of 2008. He concluded that the extent of equity in the home was the key factor in foreclosure, rather than the type of loan, [[credit worthiness]] of the borrower, or ability to pay.<ref>{{cite news |url=https://www.wsj.com/articles/SB124657539489189043 |title=New Evidence on the Foreclosure Crisis |first=Stan |last=Liebowitz |newspaper=Wall Street Journal |date=July 4, 2009 |access-date=October 5, 2017 |via=www.wsj.com}}</ref>[[File:U.S. Properties with Foreclosure Activity.png|thumb|upright=1.6|Number of U.S. residential properties subject to [[foreclosure]] actions by quarter (2007–2012)]]

Increasing foreclosure rates increases the inventory of houses offered for sale. The number of new homes sold in 2007 was 26.4% less than in the preceding year. By January 2008, the inventory of unsold new homes was 9.8 times the December 2007 sales volume, the highest value of this ratio since 1981.<ref name="MSNBC-newhome">{{cite web |title=New home sales fell by record amount in 2007 – Real estate – NBC News |website=[[NBC News]] |url=https://www.nbcnews.com/id/wbna22880294 |access-date=May 19, 2008 |year=2008}}</ref> Furthermore, nearly four million existing homes were for sale,<ref>{{cite web |title=Housing Meltdown |url=http://www.businessweek.com/magazine/content/08_06/b4070040767516.htm?chan=rss_topStories_ssi_5 |archive-url=https://web.archive.org/web/20080202025647/http://www.businessweek.com/magazine/content/08_06/b4070040767516.htm?chan=rss_topStories_ssi_5 |archive-date=February 2, 2008 |access-date=May 19, 2008 |year=2008}}</ref> of which roughly 2.2 million were vacant.<ref>{{cite web |first=Rex |last=Nutting |url=http://www.marketwatch.com/story/vacancy-rate-owned-homes-rises-record |title=Vacancy rate for owned homes rises to record high 2.9% |date=February 3, 2009 |work=MarketWatch.com |access-date=May 24, 2012}}</ref>

This overhang of unsold homes lowered house prices. As prices declined, more homeowners were at risk of [[Default (finance)|default]] or foreclosure. House prices are expected to continue declining until this inventory of unsold homes (an instance of excess supply) declines to normal levels.<ref>{{cite web |first=Alan |last=Greenspan |url=http://opinionjournal.com/editorial/feature.html?id=110010981 |title=WSJ Greenspan-The Roots of the Mortgage Crisis |publisher=Opinionjournal.com |date=December 12, 2007 |access-date=February 27, 2009}}</ref> A report in January 2011 stated that U.S. home values dropped by 26% from their peak in June 2006 to November 2010, more than the 25.9% drop between 1928 and 1933 when the [[Great Depression]] occurred.<ref>{{cite news |url=https://www.theglobeandmail.com/report-on-business/top-business-stories/decline-in-us-housing-now-greater-than-in-depression/article1865438/ |location=Toronto |newspaper=The Globe and Mail |first=Michael |last=Babad |title=Decline in U.S. housing now greater than in Depression |access-date=November 20, 2012 |date=September 10, 2012}}</ref>

From September 2008 to September 2012, there were approximately 4 million completed foreclosures in the U.S. As of September 2012, approximately 1.4 million homes, or 3.3% of all homes with a mortgage, were in some stage of foreclosure compared to 1.5 million, or 3.5%, in September 2011. During September 2012, 57,000 homes completed foreclosure; this is down from 83,000 the prior September but well above the 2000–2006 average of 21,000 completed foreclosures per month.<ref>{{cite press release |url=http://multivu.prnewswire.com/mnr/corelogic/56990/ |title=CoreLogic(R) Reports 57,000 Completed Foreclosures in September |website=multivu.prnewswire.com |access-date=October 5, 2017}}</ref>

====Homeowner speculation====
{{Main|Speculation}}
Speculative borrowing in residential real estate has been cited as a contributing factor to the subprime mortgage crisis.<ref>{{cite news |title=H. P. Minsky, 77, Economist Who Decoded Lending Trends |url=https://query.nytimes.com/gst/fullpage.html?res=990CEEDB1F30F935A15753C1A960958260 |first=Louis |last=Uchitelle |newspaper=New York Times |date=October 26, 1996 |access-date=September 26, 2008}}</ref> During 2006, 22% of homes purchased (1.65 million units) were for investment purposes, with an additional 14% (1.07 million units) purchased as vacation homes. During 2005, these figures were 28% and 12%, respectively. In other words, a record level of nearly 40% of homes purchased were not intended as primary residences. David Lereah, [[National Association of Realtors]]'s chief economist at the time, stated that the 2006 decline in investment buying was expected: "Speculators left the market in 2006, which caused investment sales to fall much faster than the primary market."<ref>{{cite news |url=https://money.cnn.com/2007/04/30/real_estate/speculators_fleeing_housing_markets/index.htm |title=Speculation statistics |work=CNN |date=April 30, 2007 |access-date=May 24, 2010 |first=Les |last=Christie}}</ref>

Housing prices nearly doubled between 2000 and 2006, a vastly different trend from the historical appreciation at roughly the rate of inflation. While homes had not traditionally been treated as investments subject to speculation, this behavior changed during the housing boom. Media widely reported condominiums being purchased while under construction, then being "flipped" (sold) for a profit without the seller ever having lived in them.<ref>{{cite web |url=http://www.local10.com/news/4277615/detail.html |title=Speculative flipping |archive-url=https://web.archive.org/web/20110926235236/http://www.local10.com/news/4277615/detail.html |archive-date=September 26, 2011 }}</ref> Some mortgage companies identified risks inherent in this activity as early as 2005, after identifying investors assuming highly leveraged positions in multiple properties.<ref>{{cite web |url=http://realtytimes.com/rtpages/20050321_tighterrules.htm |title=Speculation Risks |archive-url=https://web.archive.org/web/20120215082440/http://realtytimes.com/rtpages/20050321_tighterrules.htm |archive-date=February 15, 2012 }}</ref>

One 2017 NBER study argued that real estate investors (i.e., those owning 2+ homes) were more to blame for the crisis than subprime borrowers: "The rise in mortgage defaults during the crisis was concentrated in the middle of the credit score distribution, and mostly attributable to real estate investors" and that "credit growth between 2001 and 2007 was concentrated in the prime segment, and debt to high-risk [subprime] borrowers was virtually constant for all debt categories during this period." The authors argued that this investor-driven narrative was more accurate than blaming the crisis on lower-income, subprime borrowers.<ref name="NBER23740">{{cite journal |first1=Stefania |last1=Albanesi |first2=Giacomo |last2=De Giorgi |first3=Jaromir |last3=Nosal |title=Credit Growth and the Financial Crisis: A New Narrative |journal=NBER Working Paper No. 23740 |date=August 2017 |doi=10.3386/w23740 |s2cid=46994840 |url=http://www.nber.org/papers/w23740.pdf |doi-access=free }}</ref> A 2011 Fed study had a similar finding: "In states that experienced the largest housing booms and busts, at the peak of the market almost half of purchase mortgage originations were associated with investors. In part by apparently misreporting their intentions to occupy the property, investors took on more leverage, contributing to higher rates of default." The Fed study reported that mortgage originations to investors rose from 25% in 2000 to 45% in 2006, for Arizona, California, Florida, and Nevada overall, where housing price increases during the bubble (and declines in the bust) were most pronounced. In these states, investor delinquency rose from around 15% in 2000 to over 35% in 2007 and 2008.<ref name="FRBNY2011">{{cite web |url=https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr514.pdf |title=FRBNY-Haughwout, Lee, Tracy, and Klaauw-Real Estate Investors, the Leverage Cycle, and the Housing Market Crisis-September 2011-See page 18 and Figures 3 and 11 |access-date=October 5, 2017}}</ref>

Economist [[Robert Shiller]] argued that speculative bubbles are fueled by "contagious optimism, seemingly impervious to facts, that often takes hold when prices are rising. Bubbles are primarily social phenomena; until we understand and address the psychology that fuels them, they're going to keep forming."<ref>{{cite web |last=Crook |first=Clive |url=https://www.theatlantic.com/doc/200807/housing |title=Shiller-Infectious Exuberance-The Atlantic |publisher=Theatlantic.com |date=July 2008 |access-date=February 27, 2009}}</ref> Keynesian economist [[Hyman Minsky]] described how speculative borrowing contributed to rising debt and an eventual collapse of asset values.<ref>{{cite web |url=https://mises.org/story/2787 |title=Does the Current Financial Crisis Vindicate the Economics of Hyman Minsky? – Frank Shostak – Mises Institute |date=21 November 2007 |publisher=Mises.org |access-date=October 19, 2008}}</ref>

[[Warren Buffett]] testified to the [[Financial Crisis Inquiry Commission]]: "There was the greatest bubble I've ever seen in my life...The entire American public eventually was caught up in a belief that housing prices could not fall dramatically."<ref name="c-span.org"/>

====High-risk mortgage loans and lending/borrowing practices====
[[File:Mortgage delinquencies by loan type - 1998-2010.GIF|thumb|upright=1.6| Historically less than 2% of homebuyers lost their homes to foreclosure. But by 2009 over 40% of subprime [[Adjustable-rate mortgage|adjustable rate mortgages]] were past due.{{sfn|FCIC|2011|p=217}}]]
In the years before the crisis, the behavior of lenders changed dramatically. Lenders offered more and more loans to higher-risk borrowers.<ref name="ssrn" /><ref>{{cite news |title=Minorities hit hard by rising costs of subprime loans |url=https://www.usatoday.com/money/economy/housing/2007-04-25-subprime-minorities-usat_N.htm |access-date=May 19, 2008 |date=April 25, 2007 |work=USA Today |first1=Sue |last1=Kirchhoff |first2=Judy |last2=Keen}}</ref> 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 [[Mortgage loan#Standard or conforming mortgages|conventional, conforming]], non-subprime mortgages) declined and private securitizers share grew, rising to more than half of mortgage securitizations.<ref name="ssrn" />

Subprime mortgages grew from 5% of total originations ($35 billion) in 1994,<ref name="bankrate-20040515a2">{{cite web |title=Warning signs of a bad home loan (Page 2 of 2) |url=http://www.bankrate.com/brm/news/mortgages/20040615a2.asp |access-date=May 19, 2008 |date=June 15, 2004}}</ref><ref name="NPR-Brace">{{cite news |title=NPR: Economists Brace for Worsening Subprime Crisis (9% in 1996) |newspaper = NPR.org|url=https://www.npr.org/templates/story/story.php?storyId=12561184 |access-date=May 19, 2008 |date=June 15, 2004}}</ref> to 20% ($600 billion) in 2006.<ref name="NPR-Brace" /><ref>{{cite web |url=http://www.federalreserve.gov/newsevents/speech/bernanke20080314a.htm |title=FRB: Speech-Bernanke, Fostering Sustainable Homeownership |publisher=Federalreserve.gov |date=March 14, 2008 |access-date=October 26, 2008}}</ref><ref>{{cite news |url=https://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260&sec=&spon=&pagewanted=all |title=Fannie Mae Eases Credit To Aid Mortgage Lending |newspaper=New York Times |date=September 30, 1999 |first=Steven A. |last=Holmes}}</ref> Another indicator of a "classic" boom-bust [[credit cycle]] was a narrowing of the difference between subprime and prime mortgage interest rates (the "subprime markup") between 2001 and 2007.<ref name="ssrn.com-1020396">
{{cite journal|title=Understanding the Subprime Mortgage Crisis|last1=Demyanyk|first1=Yuliya|last2=Van Hemert|first2=Otto|date=August 19, 2008|journal=Working Paper Series|publisher=[[Social Science Electronic Publishing]]|ssrn=1020396|doi = 10.2139/ssrn.1020396|s2cid=195793149|url=http://www.frbsf.org/economics/conferences/0901/Demyanyk-VanHemert.pdf }}</ref>

In addition to considering higher-risk borrowers, lenders had offered progressively riskier loan options and borrowing incentives. In 2005, the median [[down payment]] for first-time home buyers was 2%, with 43% of those buyers making no down payment whatsoever.<ref>{{cite news |last=Knox |first=Noelle |title=43% of first-time home buyers put no money down |newspaper=[[USA Today]] |date=January 17, 2006 |url=https://www.usatoday.com/money/perfi/housing/2006-01-17-real-estate-usat_x.htm |access-date=October 18, 2008}}</ref> By comparison, China has down payment requirements that exceed 20%, with higher amounts for non-primary residences.<ref>{{cite web |url=http://sgpropertypress.wordpress.com/2007/09/19/china-to-raise-downpayment-for-second-homes-sources/ |title=China Down Payment Requirements |publisher=Sgpropertypress.wordpress.com |date=September 19, 2007 |access-date=February 27, 2009}}</ref>

To produce more mortgages and more securities, mortgage qualification guidelines became progressively looser. First, "stated income, verified assets" (SIVA) loans replaced proof of income with a "statement" of it. Then, "no income, verified assets" (NIVA) loans eliminated proof of employment requirements. Borrowers needed only to show proof of money in their bank accounts. "No Income, No Assets" (NINA) or [[Ninja loans]] eliminated the need to prove, or even to state any owned assets. All that was required for a mortgage was a credit score.<ref>{{cite web |url=http://www.stock-market-investors.com/stock-investment-risk/the-subprime-mortgage-crisis-explained.html |title=The Subprime Mortgage Crisis Explained |publisher=Stock-market-investors.com |access-date=October 3, 2010 |archive-date=July 14, 2012 |archive-url=https://web.archive.org/web/20120714200607/http://www.stock-market-investors.com/stock-investment-risk/the-subprime-mortgage-crisis-explained.html |url-status=dead }}</ref>

Types of mortgages became more risky as well. The interest-only adjustable-rate mortgage (ARM) allowed the homeowner to pay only the interest (not principal) of the mortgage during an initial "teaser" period. Even looser was the "payment option" loan, in which the homeowner has the option to make monthly payments that do not even cover the interest for the first two- or three-year initial period of the loan. Nearly one in 10 mortgage borrowers in 2005 and 2006 took out these "option ARM" loans,{{sfn|FCIC|2011}} and an estimated one-third of ARMs originated between 2004 and 2006 had "teaser" rates below 4%. After the initial period, monthly payments might double<ref name="NPR-Brace" /> or even triple.<ref name="FDIC">{{cite web |title=Interest-only mortgage payments and Option Payment ARMs |url=http://www.fdic.gov/consumers/consumer/interest-only/ |work=10/31/2006 |publisher=FDIC |access-date=September 8, 2013}}</ref>

The proportion of subprime ARM loans made to people with credit scores high enough to qualify for conventional mortgages with better terms increased from 41% in 2000 to 61% by 2006. In addition, mortgage brokers in some cases received incentives from lenders to offer subprime ARMs even to those with credit ratings that merited a conforming (i.e., non-subprime) loan.<ref>{{cite web |url=http://www.realestatejournal.com/buysell/mortgages/20071204-simon.html |title=WSJ – Subprime Debacle Traps Even Credit Worthy |publisher=Realestatejournal.com |date=December 4, 2007 |access-date=February 27, 2009}}</ref>

[[Mortgage underwriting]] standards declined precipitously during the boom period. The use of automated loan approvals allowed loans to be made without appropriate review and documentation.<ref>{{cite web |title=Bank Systems & Technology |url=http://www.banktech.com/story/featured/showArticle.jhtml?articleID=21401117 |access-date=May 19, 2008 |year=2008 |archive-url=https://web.archive.org/web/20120717022033/http://www.banktech.com/business-intelligence/21401117 |archive-date=July 17, 2012 }}</ref> In 2007, 40% of all subprime loans resulted from automated underwriting.<ref>{{cite news |first=Lynnley |last=Browning |title=The Subprime Loan Machine |url=https://www.nytimes.com/2007/03/23/business/23speed.html?_r=1&partner=rssnyt&emc=rss&oref=slogin |work=[[The New York Times]]  |date=March 27, 2007 |access-date=July 13, 2008}}</ref><ref>{{cite web |title=REALTOR Magazine-Daily News-Are Computers to Blame for Bad Lending? |url=http://www.realtor.org/rmodaily.nsf/f3c66d0c6457c1e1862570af000cb13b/b187c47b7d488dd8862572a7004ec179?OpenDocument |access-date=May 19, 2008 |year=2008}}</ref> The chairman of the Mortgage Bankers Association claimed that mortgage brokers, while profiting from the home loan boom, did not do enough to examine whether borrowers could repay.<ref>{{cite web |title=Brokers, bankers play subprime blame game – Real estate |website=NBC News |url=https://www.nbcnews.com/id/wbna18804054 |access-date=May 19, 2008 |year=2008}}</ref> [[Mortgage fraud]] by lenders and borrowers increased enormously.<ref>{{cite news |first=Tyler |last=Cowen |url=https://www.nytimes.com/2008/01/13/business/13view.html?_r=2&scp=1&sq=Tyler+Cowen&oref=login&oref=slogin |title=So We Thought. But Then Again&nbsp;.&nbsp;. |newspaper=New York Times |date=January 13, 2008 |access-date=October 26, 2008}}</ref>[[File:Subprime Mortgage Offer.jpeg|thumb|upright=1.6|A mortgage brokerage in the US advertising subprime mortgages in July 2008]]The [[Financial Crisis Inquiry Commission]] reported in January 2011 that many mortgage lenders took eager borrowers' qualifications on faith, often with a "willful disregard" for a borrower's ability to pay. Nearly 25% of all mortgages made in the first half of 2005 were "interest-only" loans. During the same year, 68% of "option ARM" loans originated by [[Countrywide Financial]] and [[Washington Mutual]] had low- or no-documentation requirements.{{sfn|FCIC|2011}}

At least one study has suggested that the decline in standards was driven by a shift of mortgage securitization from a tightly controlled duopoly to a competitive market in which mortgage originators held the most sway.<ref name=ssrn /> The worst mortgage vintage years coincided with the periods during which Government Sponsored Enterprises (specifically Fannie Mae and Freddie Mac) were at their weakest, and mortgage originators and private label securitizers were at their strongest.<ref name=ssrn />

In a [[Peabody Award]]-winning program, [[NPR]] correspondents considered why there was a market for low-quality private label securitizations. They argued that a "Giant Pool of Money" (represented by $70 trillion in worldwide fixed income investments) sought higher yields than those offered by U.S. Treasury bonds early in the decade. Further, this pool of money had roughly doubled in size from 2000 to 2007, yet the supply of relatively safe, income-generating investments had not grown as quickly. Investment banks on Wall Street answered this demand with [[financial innovation]] such as the [[mortgage-backed security]] (MBS) and [[collateralized debt obligation]] (CDO), which were assigned safe ratings by the credit rating agencies.

In effect, Wall Street connected this pool of money to the mortgage market in the U.S., with enormous fees accruing to those throughout the mortgage supply chain, from the mortgage broker selling the loans, to small banks that funded the brokers, to the giant investment banks behind them. By approximately 2003, the supply of mortgages originated at traditional lending standards had been exhausted. However, continued strong demand for MBS and CDO began to drive down lending standards, as long as mortgages could still be sold along the supply chain. Eventually, this speculative bubble proved unsustainable. NPR described it this way:<ref>{{cite web |url=http://www.pri.org/business/giant-pool-of-money.html |title="This American Life": Giant Pool of Money wins Peabody |publisher=Pri.Org |access-date=November 20, 2012 |archive-url=https://web.archive.org/web/20100415153017/http://www.pri.org/business/giant-pool-of-money.html |archive-date=April 15, 2010 }}</ref>

{{quote|The problem was that even though housing prices were going through the roof, people weren't making any more money. From 2000 to 2007, the median household income stayed flat. And so the more prices rose, the more tenuous the whole thing became. No matter how lax lending standards got, no matter how many exotic mortgage products were created to shoehorn people into homes they couldn't possibly afford, no matter what the mortgage machine tried, the people just couldn't swing it. By late 2006, the average home cost nearly four times what the average family made. Historically it was between two and three times. And mortgage lenders noticed something that they'd almost never seen before. People would close on a house, sign all the mortgage papers, and then default on their very first payment. No loss of a job, no medical emergency, they were underwater before they even started. And although no one could really hear it, that was probably the moment when one of the biggest speculative bubbles in American history popped.}}

====Subprime mortgage market====
[[File:U.S. Home Ownership and Subprime Origination Share.png|thumb|upright=1.6|U.S. Subprime lending expanded dramatically 2004–2006.]]Subprime borrowers typically have weakened credit histories and reduced repayment capacity. Subprime loans have a higher risk of [[default (finance)|default]] than loans to prime borrowers.<ref>{{cite web |url=http://www.fdic.gov/news/news/press/2001/pr0901a.html |title=FDIC-Guidance for Subprime Lending |publisher=Fdic.gov |access-date=October 3, 2010}}</ref> If a borrower is delinquent in making timely mortgage payments to the loan servicer (a bank or other financial firm), the lender may take possession of the property, in a process called [[foreclosure]].

The value of American subprime mortgages was estimated at $1.3 (~${{Format price|{{Inflation|index=US-GDP|value=1300000000000|start_year=2007}}}} in {{Inflation/year|US-GDP}}) trillion as of March 2007,<ref>{{cite news |title=How severe is subprime mess? |url=https://www.nbcnews.com/id/wbna17584725 |work=NBC News |agency=Associated Press |date=March 13, 2007 |access-date=July 13, 2008}}</ref> with over 7.5 million first-[[lien]] <!-- lien is not a misspelling - read the article -->subprime mortgages outstanding.<ref>{{cite speech |title=The Subprime Mortgage Market |author=[[Ben S. Bernanke]] |date=May 17, 2007 |location=[[Chicago, Illinois]] |url=http://www.federalreserve.gov/newsevents/speech/bernanke20070517a.htm |access-date=July 13, 2008}}</ref> Between 2004 and 2006 the share of subprime mortgages relative to total originations ranged from 18%–21%, versus less than 10% in 2001–2003 and during 2007.<ref name="blogspot1">{{cite web |url=http://mjperry.blogspot.com/2008/07/rise-and-fall-of-subprime-mortgage.html |title=CARPE DIEM: The Rise and Fall of the Subprime Mortgage Market |publisher=Mjperry.blogspot.com |date=July 17, 2008 |access-date=February 27, 2009}}</ref><ref name="publications2">{{cite web |url=http://www.jchs.harvard.edu/publications/markets/son2008/son2008.pdf |title=Harvard Report |access-date=October 3, 2010 |archive-url=https://web.archive.org/web/20100630164105/http://www.jchs.harvard.edu/publications/markets/son2008/son2008.pdf |archive-date=June 30, 2010 }}</ref> The majority of subprime loans were issued in California.<ref name="sfgate090507">{{cite news |url=http://www.sfgate.com/realestate/article/California-had-most-subprime-loans-study-says-3162878.php |title=California had most subprime loans, study says |author=Tom Abate |newspaper=San Francisco Chronicle |date=May 7, 2009 |access-date=April 8, 2013}}</ref> The boom in mortgage lending, including subprime lending, was also driven by a fast expansion of non-bank independent mortgage originators which despite their smaller share (around 25% in 2002) in the market have contributed to around 50% of the increase in mortgage credit between 2003 and 2005.<ref name="Regulation and the Mortgage Crisis">{{citation |ssrn=1728260 |title=Regulation and the Mortgage Crisis |year=2011|last1=Dagher |first1=Jihad C. |last2=Fu |first2=Ning }}</ref> In the third quarter of 2007, subprime ARMs making up only 6.9% of US mortgages outstanding also accounted for 43% of the foreclosures which began during that quarter.<ref>{{cite press release |title=Delinquencies and Foreclosures Increase in Latest MBA National Delinquency Survey |publisher=[[Mortgage Bankers Association]] |date=June 12, 2007 |url=http://www.mbaa.org/NewsandMedia/PressCenter/58758.htm |access-date=July 13, 2008 |archive-url=https://web.archive.org/web/20080618024332/http://www.mbaa.org/NewsandMedia/PressCenter/58758.htm |archive-date=June 18, 2008 }}</ref>

By October 2007, approximately 16% of subprime [[adjustable-rate mortgage]]s (ARM) were either 90-days delinquent or the lender had begun [[foreclosure]] proceedings, roughly triple the rate of 2005.<ref>{{cite speech |title=The Recent Financial Turmoil and its Economic and Policy Consequences |author=[[Ben S. Bernanke]] |date=October 17, 2007 |location=[[New York City]], New York |url=http://www.federalreserve.gov/newsevents/speech/bernanke20071015a.htm |access-date=July 13, 2008}}</ref> By January 2008, the delinquency rate had risen to 21%<ref name="Bernanke20080110a">{{cite speech |title=Financial Markets, the Economic Outlook, and Monetary Policy |author=[[Ben S. Bernanke]] |date=January 10, 2008 |location=Washington, D.C. |url=http://www.federalreserve.gov/newsevents/speech/bernanke20080110a.htm |access-date=June 5, 2008}}</ref> and by May 2008 it was 25%.<ref>{{cite speech |title=Mortgage Delinquencies and Foreclosures |author=Bernanke, Ben S |date=May 5, 2008 |event=Columbia Business School's 32nd Annual Dinner, New York City |url=http://www.federalreserve.gov/newsevents/speech/Bernanke20080505a.htm |access-date=May 19, 2008}}</ref>

According to [[RealtyTrac]], the value of all outstanding residential mortgages, owed by U.S. households to purchase residences housing at most four families, was US$9.9 trillion as of year-end 2006, and US$10.6 trillion as of midyear 2008.<ref>[http://www.federalreserve.gov/releases/z1/Current/z1r-4.pdf Board of Governors of the U.S. Federal Reserve System, Release Z.1, 9/18/08.] {{Webarchive|url=https://web.archive.org/web/20120711035225/http://www.federalreserve.gov/releases/z1/Current/z1r-4.pdf |date=2012-07-11 }} Table L.218, line 2. Note that $1.1 trillion (line 22) of the $10.6 trillion total consisted of home equity loans.</ref> During 2007, lenders had begun foreclosure proceedings on nearly 1.3 million properties, a 79% increase over 2006.<ref>{{cite news |title=U.S. FORECLOSURE ACTIVITY INCREASES 75 PERCENT IN 2007 |date=January 29, 2008 |publisher=RealtyTrac |url=http://www.realtytrac.com/ContentManagement/pressrelease.aspx?ChannelID=9&ItemID=3988&accnt=64847 |access-date=June 6, 2008 |archive-url=https://web.archive.org/web/20080426034654/http://www.realtytrac.com/ContentManagement/pressrelease.aspx?ChannelID=9&ItemID=3988&accnt=64847 |archive-date=April 26, 2008 }}</ref> This increased to 2.3 million in 2008, an 81% increase vs. 2007,<ref>{{cite web |url=http://www.realtytrac.com/ContentManagement/pressrelease.aspx?ChannelID=9&ItemID=5681&accnt=64847 |title=RealtyTrac Press Release 2008FY |publisher=Realtytrac.com |date=January 15, 2009 |access-date=February 27, 2009 |archive-url=https://web.archive.org/web/20120717060347/http://www.realtytrac.com/content/press-releases/foreclosure-activity-increases-81-percent-in-2008-4551?accnt=64847 |archive-date=July 17, 2012 }}</ref> and again to 2.8 million in 2009, a 21% increase vs. 2008.<ref>{{cite web |url=http://www.realtytrac.com/contentmanagement/pressrelease.aspx?channelid=9&accnt=0&itemid=8333 |title=Realty Trac-2009 Year End Report |publisher=Realtytrac.com |access-date=October 3, 2010 |archive-url=https://web.archive.org/web/20120717060407/http://www.realtytrac.com/content/press-releases/?accnt=0 |archive-date=July 17, 2012 }}</ref>

By August 2008, 9.2% of all U.S. mortgages outstanding were either delinquent or in foreclosure.<ref name="mbaa1">{{cite web |url=http://www.mbaa.org/NewsandMedia/PressCenter/64769.htm |title=MBA Survey |archive-url=https://web.archive.org/web/20130514124250/http://www.mbaa.org/NewsandMedia/PressCenter/64769.htm |archive-date=May 14, 2013 }}</ref> By September 2009, this had risen to 14.4%.<ref>{{cite web |url=http://www.mbaa.org/NewsandMedia/PressCenter/71112.htm |title=MBA Survey-Q3 2009 |publisher=Mbaa.org |date=November 19, 2009 |access-date=October 3, 2010 |archive-url=https://web.archive.org/web/20100728105357/http://www.mbaa.org/NewsandMedia/PressCenter/71112.htm |archive-date=July 28, 2010 }}</ref>
Between August 2007 and October 2008, 936,439 US residences completed foreclosure.<ref>{{cite news |author=Catherine Clifford |url=https://money.cnn.com/2008/11/13/real_estate/foreclosures_october/index.htm?postversion=2008111303 |title=CNN Foreclosures |work=CNN Money |date=November 13, 2008 |access-date=February 27, 2009}}</ref> Foreclosures are concentrated in particular states both in terms of the number and rate of foreclosure filings.<ref>{{cite news |url=http://www.nypost.com/seven/02212009/postopinion/opedcolumnists/the_foreclosure_five_156287.htm |title=The Foreclosure Five |publisher=NY Post |date=February 21, 2009 |access-date=February 27, 2009 |first=Julia |last=Vitullo-Martin}}</ref> Ten states accounted for 74% of the foreclosure filings during 2008; the top two (California and Florida) represented 41%. Nine states were above the national foreclosure rate average of 1.84% of households.<ref>{{cite web |url=http://www.realtytrac.com/ContentManagement/pressrelease.aspx?ChannelID=9&ItemID=5681&accnt=64847 |title=Realty-Trac 2008 Foreclosure Report |publisher=Realtytrac.com |date=January 15, 2009 |access-date=February 27, 2009 |archive-url=https://web.archive.org/web/20120717060347/http://www.realtytrac.com/content/press-releases/foreclosure-activity-increases-81-percent-in-2008-4551?accnt=64847 |archive-date=July 17, 2012 }}</ref>

====Mortgage fraud and predatory lending====
[[File:Mortgage loan fraud.svg|thumb|upright=1.6|Growth in [[Mortgage fraud|mortgage loan fraud]] based upon US Department of the Treasury Suspicious Activity Report Analysis]]
"The FBI defines [[mortgage fraud]] as 'the intentional misstatement, misrepresentation, or omission by an applicant or other interest parties, relied on by a lender or underwriter to provide funding for, to purchase, or to insure a mortgage loan.'"<ref>Joseph Fried, ''Who Really Drove the Economy Into the Ditch'' (New York: Algora Publishing, 2012, 181.</ref> In 2004, the [[Federal Bureau of Investigation]] warned of an "epidemic" in mortgage fraud, an important [[credit risk]] of nonprime mortgage lending, which, they said, could lead to "a problem that could have as much impact as the [[S&L crisis]]".<ref>{{cite web |url=http://www.cnn.com/2004/LAW/09/17/mortgage.fraud/ |title=CNN.com – FBI warns of mortgage fraud 'epidemic' – Sep 17, 2004 |first=Terry  |last=Frieden |website=www.cnn.com |access-date=October 5, 2017}}</ref><ref>{{Cite web|url=https://www.fbi.gov/pressrel/pressrel05/quickflip121405.htm|archive-url=https://web.archive.org/web/20060830053824/https://www.fbi.gov/pressrel/pressrel05/quickflip121405.htm|title=FBI Press Release on "Operation Quickflip"|archive-date=August 30, 2006}}</ref><ref>{{cite web |url=https://www.latimes.com/archives/la-xpm-2008-aug-25-fi-mortgagefraud25-story.html |title=FBI saw threat of loan crisis |first=Richard B. |last=Schmitt |date=August 25, 2008 |access-date=October 5, 2017 |via=LA Times}}</ref><ref>{{cite web |url=https://www.huffingtonpost.com/william-k-black/the-two-documents-everyon_b_169813.html |title=The Two Documents Everyone Should Read to Better Understand the Crisis |first=William K. |last=Black |website=[[HuffPost]] |date=March 28, 2009 |access-date=October 5, 2017}}</ref> Despite this, the [[Presidency of George W. Bush|Bush administration]] prevented states from investigating and prosecuting [[Predatory lender|predatory lenders]] by invoking a banking law from 1863 "to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative."<ref>{{cite web |url=https://www.washingtonpost.com/wp-dyn/content/article/2008/02/13/AR2008021302783.html |title=Eliot Spitzer – Predatory Lenders' Partner in Crime |first=Eliot |last=Spitzer |date=February 14, 2008 |access-date=October 5, 2017 |via=www.washingtonpost.com}}</ref>

The [[Financial Crisis Inquiry Commission]] reported in January 2011 that: "... mortgage fraud... flourished in an environment of collapsing lending standards and lax regulation. The number of suspicious activity reports – reports of possible financial crimes filed by depository banks and their affiliates – related to mortgage fraud grew 20-fold between 1996 and 2005 and then more than doubled again between 2005 and 2009. One study places the losses resulting from fraud on mortgage loans made between 2005 and 2007 at $112 billion."{{sfn|FCIC|2011}}

The report continued that "Lenders made loans that they knew borrowers could not afford and that could cause massive losses to investors in mortgage securities."{{sfn|FCIC|2011}}  The unfair, deceptive, or fraudulent practices by lenders during the loan origination process was a  form of [[predatory lending]].<ref>{{Cite web |title=predatory lending |url=https://www.law.cornell.edu/wex/predatory_lending |access-date=2025-01-28 |website=LII / Legal Information Institute |language=en}}</ref>

===Financial markets===
====Boom and collapse of the shadow banking system====
[[File:Shadow banking.GIF|thumb|upright=1.6|Comparison of the growth of traditional banking and [[Shadow banking system|shadow banking]]{{sfn|FCIC|2011|p=32}}]]
The [[Financial Crisis Inquiry Commission]] reported in January 2011:
<blockquote>In the early part of the 20th century, we erected a series of protections – the Federal Reserve as a [[lender of last resort]], federal deposit insurance, ample regulations – to provide a bulwark against the panics that had regularly plagued America's banking system in the 19th century. Yet, over the past 30-plus years, we permitted the growth of a shadow banking system – opaque and laden with short term debt – that rivaled the size of the traditional banking system. Key components of the market – for example, the multitrillion-dollar repo lending market, off-balance-sheet entities, and the use of over-the-counter derivatives – were hidden from view, without the protections we had constructed to prevent financial meltdowns. We had a 21st-century financial system with 19th-century safeguards.{{sfn|FCIC|2011|p=xx}}</blockquote>

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]]. These entities became critical to the credit markets underpinning the financial system, but were not subject to the same regulatory controls as depository banks. Further, these entities were vulnerable because they borrowed short-term in liquid markets to purchase long-term, illiquid and risky assets. This meant that disruptions in credit markets would make them subject to rapid [[leverage (finance)|deleveraging]], selling their long-term assets at depressed prices.<ref name="newyorkfed.org" />

Repo and other forms of shadow banking accounted for an estimated 60% of the "overall US banking system," according to Nobel laureate economist [[Paul Krugman]].<ref name="slump" /> Geithner described its "entities": <blockquote>In early 2007, [[asset-backed commercial paper]] conduits, in structured investment vehicles, in auction-rate preferred securities, tender option bonds and variable rate demand notes, had a combined asset size of roughly $2.2 (~${{Format price|{{Inflation|index=US-GDP|value=2200000000000|start_year=2007}}}} in {{Inflation/year|US-GDP}}) trillion. Assets financed overnight in triparty repo grew to $2.5 trillion. Assets held in hedge funds grew to roughly $1.8 trillion. The combined balance sheets of the then five major investment banks totaled $4 trillion. In comparison, the total assets of the top five bank holding companies in the United States at that point were just over $6 trillion, and total assets of the entire banking system were about $10 trillion.</blockquote> He stated that the "combined effect of these factors was a financial system vulnerable to self-reinforcing asset price and credit cycles."<ref name="newyorkfed.org" />
Krugman described the run on the shadow banking system as the "core of what happened" to cause the crisis. <blockquote>As the shadow banking system expanded to rival or even surpass conventional banking in importance, politicians and government officials should have realized that they were re-creating the kind of financial vulnerability that made the Great Depression possible – and they should have responded by extending regulations and the financial safety net to cover these new institutions. Influential figures should have proclaimed a simple rule: anything that does what a bank does, anything that has to be rescued in crises the way banks are, should be regulated like a bank.</blockquote> He referred to this lack of controls as "malign neglect."<ref name="Krugman 2009">{{cite book |last=Krugman |first=Paul |author-link=Paul Krugman |year=2009 |title=The Return of Depression Economics and the Crisis of 2008 |publisher=W.W. Norton Company Limited |isbn=978-0-393-07101-6|title-link=The Return of Depression Economics and the Crisis of 2008 }}</ref><ref>{{cite news |url=https://www.nytimes.com/2010/04/02/opinion/02krugman.html |title=Opinion - Financial Reform 101 |first=Paul |last=Krugman |newspaper=The New York Times |date=April 1, 2010 |access-date=October 5, 2017 }}</ref>

The securitization markets supported by the shadow banking system started to close down in the spring of 2007 and nearly shut-down in the fall of 2008. More than a third of the private credit markets thus became unavailable as a source of funds.<ref name="Search Site" /> According to the [[Brookings Institution]], the traditional banking system does not have the capital to close this gap as of June 2009: "It would take a number of years of strong profits to generate sufficient capital to support that additional lending volume." The authors also indicate that some forms of securitization are "likely to vanish forever, having been an artifact of excessively loose credit conditions."<ref name="brookings.edu" />

Economist [[Gary Gorton]] wrote in May 2009: <blockquote>Unlike the historical banking panics of the 19th and early 20th centuries, the current banking panic is a wholesale panic, not a retail panic. In the earlier episodes, depositors ran to their banks and demanded cash in exchange for their checking accounts. Unable to meet those demands, the banking system became insolvent. The current panic involved financial firms "running" on other financial firms by not renewing sale and repurchase agreements (repo) or increasing the repo margin ("haircut"), forcing massive [[deleveraging]], and resulting in the banking system being insolvent.<ref name="frbatlanta.org" /></blockquote>

Fed Chair [[Ben Bernanke]] stated in an interview with the FCIC during 2009 that 12 of the 13 largest U.S. financial institutions were at risk of failure during 2008. The FCIC report did not identify which of the 13 firms was not considered by Bernanke to be in danger of failure.<ref>{{cite news |url=https://www.reuters.com/article/financial-regulation-fcic/update-1-split-us-crisis-panel-blames-greenspan-wall-st-idUSN2713264020110127 |title=UPDATE 3-Bernanke: all but one major firm at risk in 2008 |date=January 27, 2011 |access-date=October 5, 2017 |newspaper=Reuters}}</ref>

Economist [[Mark Zandi]] testified to the [[Financial Crisis Inquiry Commission]] in January 2010:
<blockquote>The securitization markets also remain impaired, as investors anticipate more loan losses. Investors are also uncertain about coming legal and accounting rule changes and regulatory reforms. Private bond issuance of residential and commercial mortgage-backed securities, asset-backed securities, and CDOs peaked in 2006 at close to $2 trillion...In 2009, private issuance was less than $150 billion, and almost all of it was asset-backed issuance supported by the Federal Reserve's TALF program to aid credit card, auto and small-business lenders. Issuance of residential and commercial mortgage-backed securities and CDOs remains dormant.<ref>{{Cite web|url=http://www.fcic.gov/hearings/pdfs/2010-0113-Zandi.pdf|archive-url=https://web.archive.org/web/20101215044241/http://fcic.gov/hearings/pdfs/2010-0113-Zandi.pdf|title=Testimony of Mark Zandi to Financial Crisis Inquiry Commission-January 2010|archive-date=December 15, 2010}}</ref></blockquote>

''[[The Economist]]'' reported in March 2010: "Bear Stearns and Lehman Brothers were non-banks that were crippled by a silent run among panicky overnight "[[repo]]" lenders, many of them money market funds uncertain about the quality of securitized collateral they were holding. Mass redemptions from these funds after Lehman's failure froze short-term funding for big firms."<ref>{{cite news |url=https://www.economist.com/opinion/displaystory.cfm?story_id=15770705 |title=Shine a light |date=March 25, 2010 |access-date=October 5, 2017 |newspaper=The Economist}}</ref>

====Securitization====
{{Further|Securitization|Mortgage-backed security}}
[[File:Borrowing Under a Securitization Structure.png|thumb|upright=1.6|Borrowing under a [[securitization]] structure]]
[[Securitization]] – the bundling of bank loans to create [[Trade (financial instrument)|tradeable]] [[Bond (finance)|bond]]s – started in the mortgage industry in the 1970s, when Government Sponsored Enterprises (GSEs) began to pool relatively safe, conventional, "[[Conforming loan|conforming]]" or "prime" mortgages, create "[[mortgage-backed securities]]" (MBS) from the pool, sell them to investors, guaranteeing these securities/bonds against default on the underlying mortgages.<ref name="ssrn" /><ref>{{cite book |page=[https://archive.org/details/fixedincomesecur00tuck_102/page/n579 568] |title=Fixed Income Securities: Tools for Today's Markets |url=https://archive.org/details/fixedincomesecur00tuck_102 |url-access=limited |last1=Tuckman |first1=Bruce |last2=Serrat |first2=Angel |publisher=Wiley |year=2011|isbn=978-0-470-89169-8 }}</ref> This "originate-to-distribute" model had advantages over the old "originate-to-hold" model,{{sfn|FCIC|2011|p=89}} where a bank originated a loan to the borrower/homeowner and retained the credit (default) risk. Securitization removed the loans from a bank's books, enabling the bank to remain in compliance with capital requirement laws. More loans could be made with proceeds of the MBS sale. The [[Market liquidity|liquidity]] of a national and even international mortgage market allowed capital to flow where mortgages were in demand and funding short. However, securitization created a [[moral hazard]] – the bank/institution making the loan no longer had to worry if the mortgage was paid off<ref name="Devils-19">{{cite book |first1=Bethany |last1=McLean |first2=Joe |last2=Nocera |title=All the Devils Are Here |url=https://archive.org/details/alldevilsarehere00mcle |url-access=registration |year=2010 |publisher=Portfolio, Penguin |page=[https://archive.org/details/alldevilsarehere00mcle/page/19 19] |isbn=978-1-59184-363-4 |quote=After the REMIC battle, [whatever that was] Wall Street realized it was never going to dislodge Fannie and Freddie from their dominant position as the securitizers of traditional mortgages. ... Wall Street would have to find some other mortgage product to securitize, products that Fannie and Feddie couldn't – or wouldn't – touch. .... 'Their effort became one to find products they could profit from where they didn't have to compete with Fannie.'}}</ref> – giving them incentive to process mortgage transactions but not to ensure their credit quality.<ref>{{cite news |title='Moral hazard' helps shape mortgage mess |first=Holden |last=Lewis |publisher=Bankrate.com |url=http://www.bankrate.com/brm/news/mortgages/20070418_subprime_mortgage_morality_a1.asp?caret=3c |date=April 18, 2007}}</ref><ref>{{cite journal |first=Amiyatosh K. |last=Purnanandam |title=Originate-to-distribute Model and the Subprime Mortgage Crisis |journal=Review of Financial Studies |volume=24 |issue=6 |year=2011 |pages=1881–1915 |doi=10.1093/rfs/hhq106 }}</ref> Bankers were no longer around to work out borrower problems and minimize defaults during the course of the mortgage.<ref name="autogenerated1">Lemke, Lins and Picard, ''Mortgage-Backed Securities'', Chapter 3 (Thomson West, 2013 ed.).</ref>

With the high [[down payment]]s and [[Credit score in the United States|credit score]]s of the conforming mortgages used by GSE, this danger was minimal.<ref name="samuelson">{{cite web |last=Samuelson |first=Robert J. |title=Reckless Optimism |url=http://www.claremont.org/publications/crb/id.1916/article_detail.asp |date=January 31, 2012 |publisher=Claremont Institute |access-date=September 30, 2013 |quote=Most home mortgages were relatively safe investments, and Fannie and Freddie's lending standards were conservative. In the main, the GSEs bought and guaranteed loans with sizeable down payments, typically 20%, for borrowers who could be expected, based on their incomes and credit histories, to meet their monthly mortgage payments with little difficulty. By regulation, the GSEs were not allowed to deal in mortgages above a given amount ($417,000 in 2007, before the crisis). Private lenders, therefore, were left with both the larger and the riskier mortgages, all of which were called "non-conforming" loans because they didn't fit the GSEs' criteria. The GSEs seemed to have a lock on the "conforming" market, the bigger, safer part of the mortgage business. |archive-url=https://web.archive.org/web/20131224113222/http://www.claremont.org/publications/crb/id.1916/article_detail.asp |archive-date=December 24, 2013 }}</ref> Investment banks however, wanted to enter the market and avoid competing with the GSEs.<ref name="Devils-19" /> They did so by developing mortgage-backed securities in the riskier non-conforming subprime and [[Alt-A]] market. Unlike the GSEs<ref name="more">{{cite web |last=Walden |first=Gene |title=Make More with Mortgage-backed Securities |url=http://www.allstarstocks.com/gpage1.html |publisher=AllStarStocks.com |quote=Securities issued by Fannie Mae and Freddie Mac are also guarantee ... the timely payment of all principal and interest of the mortgage-backed securities they issue. Although their guarantee doesn't carry the weight of the U.S. government, Freddie Mac and Fannie Mae are two of the most fiscally sound corporations in America. Their mortgage-backed securities are considered to be the equivalent of AAA-rated corporate bonds. They have never defaulted on a mortgage-backed security.}}</ref> the issuers generally did not guarantee the securities against default of the underlying mortgages.<ref name="ssrn" />

What these "private label" or "non-agency" originators did do was to use "[[structured finance]]" to create securities. Structuring involved "slicing" the pooled mortgages into "tranches", each having a different priority in the monthly or quarterly principal and interest stream.{{sfn|FCIC|2011|p=70}}<ref name="tranch">{{cite book |last=Katz |first=Alyssa |title=Our Lot: How Real Estate Came To Own Us, Kindle Edition |url=https://archive.org/details/ourlothowrealest00katz |url-access=registration |year=2009 |publisher=[[Bloomsbury Publishing|Bloomsbury USA, New York]] |isbn=978-1-60819-140-6 |pages=400–407}}</ref> Tranches were compared to "buckets" catching the "water" of principal and interest. More senior buckets did not share water with those below until they were filled to the brim and overflowing.<ref>[http://upstart.bizjournals.com/multimedia/interactives/2007/12/cdo.html Here's how a CDO works]| Upstart Business Journal| December 5, 2007</ref> This gave the top buckets/tranches considerable creditworthiness (in theory) that would earn the highest "triple A" credit ratings, making them sellable to [[Money market fund|money market]] and [[pension fund]]s that would not otherwise deal with subprime mortgage securities.[[File:CDO - FCIC and IMF Diagram.png|thumb|upright=1.6|[[IMF]] diagram of [[Collateralized debt obligation|CDO]] and [[Residential mortgage-backed security|RMBS]]]]To use up the MBS tranches lower in payback priority that could not be rated triple-A and that a conservative [[fixed income]] market would not buy, investment banks developed another security – known as the [[collateralized debt obligation]] (CDO). Although the CDO market was smaller, it was crucial because unless buyers were found for the non-triple-A or "[[Mezzanine capital|mezzanine]]" tranches, it would not be profitable to make a mortgage-backed security in the first place.<ref name="reckless-278">Morgenson and Rosner ''Reckless Endangerment'', 2010 p.278</ref><ref>see also ''Financial Crisis Inquiry Report'', p. 127</ref> These CDOs pooled the leftover BBB, A−, etc. rated tranches, and produced new tranches – 70%<ref>70%. "Firms bought mortgage-backed bonds with the very highest yields they could find and reassembled them into new CDOs. The original bonds ... could be lower-rated securities that once reassembled into a new CDO would wind up with as much as 70% of the tranches rated triple-A. Ratings arbitrage, Wall Street called this practice. A more accurate term would have been ratings laundering." (source: McLean and Nocera, ''All the Devils Are Here'', 2010 p. 122)</ref> to 80%<ref>80%. "In a CDO you gathered a 100 different mortgage bonds – usually the riskiest lower floors of the original tower ...... They bear a lower credit rating triple B. ... if you could somehow get them rerated as triple A, thereby lowering their perceived risk, however dishonestly and artificially. This is what Goldman Sachs had cleverly done. It was absurd. The 100 buildings occupied the same floodplain; in the event of flood, the ground floors of all of them were equally exposed. But never mind: the rating agencies, who were paid fat fees by Goldman Sachs and other Wall Street firms for each deal they rated, pronounced 80% of the new tower of debt triple-A." (source: Michael Lewis, ''[[The Big Short: Inside the Doomsday Machine]]'' WW Norton and Co, 2010, p. 73)</ref> of which were rated triple A by rating agencies. The 20–30% remaining mezzanine tranches were sometimes bought up by other CDOs, to make so-called "[[CDO-Squared]]" securities which also produced tranches rated mostly triple A.<ref>"According to data compiled by the FCIC, tranches from CDOs rose from an average of 7% of the collateral in mortgage-backed CDOs in 2003 to 14% by 2007. CDO-squared deals – those engineered primarily from the tranches of other CDOs – grew from 36 marketwide in 2005 to 48 in 2006 and 41 2007." ''Financial Crisis Inquiry Report'', p. 203</ref>

This process was later disparaged as "ratings laundering"<ref>McLean, and Nocera. ''All the Devils Are Here'', 2010 (p. 122)</ref> or a way of transforming "dross into gold"<ref name="Endangerment-280">{{cite book |first1=Gretchen |last1=Morgenson |first2=Joshua |last2=Rosner |title=Reckless Endangerment: How Outsized ambition, Greed and Corruption Led to Economic Armageddon |year=2011 |publisher=Times Books, Henry Holt and Company |location=New York |url=https://archive.org/details/recklesendangerm00morg |url-access=registration |page=[https://archive.org/details/recklesendangerm00morg/page/280 280]|isbn=978-1-4299-6577-4 }}</ref> by some business journalists, but was justified at the time by the belief that home prices would always rise.<ref>{{cite web |last=Kourlas |first=James |title=Lessons Not Learned From the Housing Crisis |url=http://www.atlassociety.org/brc/lessons-housing-crisis |date=April 12, 2012 |publisher=The Atlas Society |quote=In the post-war period, falling home prices were rare. From 1945 to 2006, nominal home prices never fell on the national level, at least not significantly. Some argue that there was a drop of 1 percent in 1963 and 1990; there were regional drops such as in California in the early 1990s. But a 25–30% drop in the national average just wasn't part of the historical record. Consequently, models used to price mortgage portfolios under-weighted scenarios with large price declines. |access-date=December 24, 2012}}</ref><ref>{{cite journal |title=Reckless Optimism |last=Samuelson |first=Robert J. |journal=Claremont Review of Books |volume=XII |issue=1 |year=2011 |page=13 |url=http://www.claremont.org/publications/crb/id.1916/article_detail.asp |quote=The mortgage debacle, ... was simply one manifestation, ... of a climate that made foolish practices seem sensible. A broad underestimation of risk rested on self-serving assumptions. It was, for example, widely assumed that home prices would always rise, meaning that if borrowers defaulted lenders would be protected against heavy losses. This was one reason why Standard & Poor's and Moody's gave mortgage-related securities high ratings. |archive-url=https://web.archive.org/web/20131224113222/http://www.claremont.org/publications/crb/id.1916/article_detail.asp |archive-date=December 24, 2013 }}</ref> The [[Mathematical model|model]] used by underwriters, rating agencies and investors to estimate the probability of mortgage default was based on the history of [[credit default swaps]], which unfortunately went back "less than a decade, a period when house prices soared".<ref name="recipe">{{Cite news |last=Salmon |first=Felix |title=Recipe for Disaster: The Formula That Killed Wall Street |newspaper=Wired |date=February 23, 2009 |url=https://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all}}</ref>

In addition the model – which postulated that the correlation of default risks among loans in securitization pools could be measured in a simple, stable, tractable number, suitable for risk management or valuation<ref name="recipe" /> – also purported to show that the mortgages in CDO pools were well [[Diversification (finance)|diversified]] or "uncorrelated". Defaults on mortgages in [[Orlando, Florida|Orlando]], for example, were thought to have no effect on – i.e. were uncorrelated with – the real estate market across the country in [[Laguna Beach]]. When prices [[Market correction|corrected]] (i.e. the bubble collapsed), the resulting defaults were not only larger in number than predicted but far more correlated.<ref name="recipe" />

Still another innovative security criticized after the bubble burst was the [[synthetic CDO]]. Cheaper and easier to create than original "cash" CDOs, synthetics did not provide funding for housing, rather synthetic CDO-buying investors were in effect providing insurance (in the form of "credit default swaps") against mortgage default. The mortgages they insured were those in "cash" CDOs the synthetics "referenced". So instead of providing investors with interest and principal payments from MBS tranches, payments were the equivalent of [[Insurance premium|insurance premiums]] from the insurance "buyers".<ref>credit default swap insurance "buyers" were known as "[[Short (finance)|short]] investors"</ref> If the referenced CDOs defaulted, investors lost their investment, which was paid out to the insurance buyers.<ref>"Unlike the traditional cash CDO, synthetic CDOs contained no actual tranches of mortgage-backed securities ... in the place of real mortgage assets, these CDOs contained credit default swaps and did not finance a single home purchase." (source: ''The Financial Crisis Inquiry Report'', 2011, p. 142)</ref>

Unlike true insurance, credit default swaps were not regulated to insure that providers had the reserves to pay settlements, or that buyers owned the property (MBSs) they were insuring, i.e. were not simply making a bet a security would default.{{sfn|FCIC|2011|p=50}} Because synthetics "referenced" another (cash) CDO, more than one – in fact numerous – synthetics could be made to reference the same original, multiplying the effect if a referenced security defaulted.<ref>McLean, and Nocera. ''All the Devils Are Here'', 2010 (p. 263)</ref><ref name="propublica.org">{{cite web |url=https://www.propublica.org/feature/all-the-magnetar-trade-how-one-hedge-fund-helped-keep-the-housing-bubble |archive-url=https://web.archive.org/web/20100410084812/http://www.propublica.org/feature/all-the-magnetar-trade-how-one-hedge-fund-helped-keep-the-housing-bubble |archive-date=April 10, 2010 |title=The Magnetar Trade: How One Hedge Fund Helped Keep the Bubble Going — ProPublica |date=April 9, 2010 |website=ProPublica |access-date=October 5, 2017 }}</ref> As with MBS and other CDOs, triple A ratings for "large chunks"<ref>McLean and Nocera. ''All the Devils Are Here'', 2010 (p. 265)</ref> of synthetics were crucial to the securities' success, because of the buyer/investors' ignorance of the mortgage security market and trust in the credit rating agencies ratings.<ref>McLean and Nocera. ''All the Devils Are Here'', 2010 (p. 266)</ref>

Securitization began to take off in the mid-1990s. The total amount of mortgage-backed securities issued almost tripled between 1996 and 2007, to $7.3 trillion. The securitized share of subprime mortgages (i.e., those passed to third-party investors via MBS) increased from 54% in 2001, to 75% in 2006.<ref name="ssrn.com-1020396" /> In the mid-2000s as the housing market was peaking, [[Government-sponsored enterprise|GSE]] securitization market share declined dramatically, while higher-risk [[subprime]] and [[Alt-A]] mortgage private label securitization grew sharply.<ref name="ssrn" /> As mortgage defaults began to rise, it was among mortgages securitized by the [[private banks]]. GSE mortgages – securitized or not – continued to perform better than the rest of the market.<ref name="ssrn" /><ref>Deliquencies among prime, fixed rate mortgages never rose over 5%. ''Financial Crisis Inquiry Report'', p. 217, figure 11.2</ref> Picking up the slack for the dwindling cash CDO market{{sfn|FCIC|2011|p=188}} synthetics were the dominant form of CDO's by 2006,<ref name="greatest" /> valued "[[Notional amount|notionally]]"<ref>the total of the underlying debt of synthetics on which investors were betting</ref> at an estimated $5 trillion.<ref name="greatest">Zuckerman, Gregory, ''[[The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History]]'', Broadway Books, 2009, p. 176</ref>

By the autumn of 2008, when the securitization market "seized up" and investors would "no longer lend at any price", securitized lending made up about $10 trillion of the roughly $25 trillion American credit market, (i.e. what "American homeowners, consumers, and corporations owed").<ref name="Search Site">{{cite web |first=Nicole |last=Gelinas |url=http://www.city-journal.org/2009/19_1_credit.html |title=Can the Fed's Uncrunch Credit? |publisher=City-journal.org |year=2009 |access-date=February 27, 2009 |archive-date=May 10, 2012 |archive-url=https://web.archive.org/web/20120510024457/http://www.city-journal.org/2009/19_1_credit.html |url-status=dead }}</ref><ref name="brookings.edu">{{Cite web|url=http://www.brookings.edu/papers/2009/0615_economic_crisis_baily_elliott.aspx|archive-url=https://web.archive.org/web/20100603093153/http://www.brookings.edu/papers/2009/0615_economic_crisis_baily_elliott.aspx|title=Brookings Institution – U.S. Financial and Economic Crisis June 2009 PDF p. 14|archive-date=June 3, 2010}}</ref> In February 2009, [[Ben Bernanke]] stated that securitization markets remained effectively shut, with the exception of [[Conforming loan|conforming mortgages]], which could be sold to [[Fannie Mae]] and [[Freddie Mac]].<ref>{{cite web |first=Ben S. |last=Bernanke |url=http://www.federalreserve.gov/newsevents/testimony/bernanke20090224a.htm |title=Prepared Testimony |date=February 24, 2009 |access-date=February 24, 2009}}</ref>

According to economist [[A. Michael Spence]]: "when formerly uncorrelated risks shift and become highly correlated ... diversification models fail." "An important challenge going forward is to better understand these dynamics as the analytical underpinning of an early warning system with respect to financial instability."<ref name="viewpoints1">{{cite web |url=http://media.pimco.com/Documents/Lessons%20from%20the%20Crisis.pdf |title=Lessons from the Crisis |publisher=PIMCO |date=November 26, 2008 |access-date=February 27, 2009 |archive-date=May 2, 2012 |archive-url=https://web.archive.org/web/20120502170805/http://media.pimco.com/Documents/Lessons%20from%20the%20Crisis.pdf |url-status=dead }}</ref>

Criticizing the argument that complex structured investment securitization was instrumental in the mortgage crisis, [[Paul Krugman]] points out that the Wall Street firms issuing the securities "kept the riskiest assets on their own books", and that neither of the equally disastrous bubbles in European housing or US commercial property used complex structured securities. Krugman does agree that it is "arguable is that financial innovation ... spread the bust to financial institutions around the world" and its inherent fragmentation of loans has made post-bubble "cleanup" through debt renegotiation extremely difficult.<ref name="slump">{{cite journal |first1=Paul |last1=Krugman |first2=Robin |last2=Wells |title=The Slump Goes On: Why? |journal=New York Review of Books |date=September 30, 2010 |volume=57 |issue=14 |url=http://www.nybooks.com/articles/archives/2010/sep/30/slump-goes-why/?page=2 |access-date=November 20, 2013}}</ref>

====Financial institution debt levels and incentives====
[[File:Leverage ratios for major investment banks.svg|thumb|upright=1.6|[[Leverage ratio|Leverage ratios]] of [[investment banks]] increased significantly between 2003 and 2007.]]

The [[Financial Crisis Inquiry Commission]] reported in January 2011 that: "From 1978 to 2007, the amount of debt held by the financial sector soared from $3 trillion to $36 trillion, more than doubling as a share of gross domestic product. The very nature of many Wall Street firms changed – from relatively staid private partnerships to publicly traded corporations taking greater and more diverse kinds of risks. By 2005, the 10 largest U.S. commercial banks held 55% of the industry's assets, more than double the level held in 1990. On the eve of the crisis in 2006, financial sector profits constituted 27% of all corporate profits in the United States, up from 15% in 1980."{{sfn|FCIC|2011}}

Many [[financial institutions]], [[investment bank]]s in particular, issued large amounts of debt during 2004–07, and invested the proceeds in [[mortgage-backed securities]] (MBS), essentially betting that house prices would continue to rise, and that households would continue to make their mortgage payments. Borrowing at a lower interest rate and investing the proceeds at a higher interest rate is a form of [[financial leverage]]. This is analogous to an individual taking out a second mortgage on his residence to invest in the stock market. This strategy proved profitable during the housing boom, but resulted in large losses when house prices began to decline and mortgages began to default. Beginning in 2007, financial institutions and individual investors holding MBS also suffered significant losses from mortgage payment defaults and the resulting decline in the value of MBS.<ref name="BlackburnSMC1">{{Cite journal |last=Blackburn |first=Robin | author-link = Robin Blackburn |title=The Subprime Crisis |journal=[[New Left Review]] |volume=II |issue=50 |date=March–April 2008 |url=http://newleftreview.org/II/50/robin-blackburn-the-subprime-crisis }}</ref>

A 2004 [[U.S. Securities and Exchange Commission]] (SEC) decision related to the [[net capital rule]] allowed US investment banks to issue substantially more debt, which was then used to purchase MBS. Over 2004–07, the top five US investment banks each significantly increased their financial leverage (see diagram), which increased their vulnerability to the declining value of MBSs. These five institutions reported over $4.1 trillion in debt for fiscal year 2007, about 30% of US nominal GDP for 2007. Further, the percentage of subprime mortgages originated to total originations increased from below 10% in 2001–03 to between 18–20% from 2004 to 2006, due in-part to financing from investment banks.<ref name="blogspot1" /><ref name="publications2" />

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]]). These failures augmented the instability in the [[global financial system]]. The remaining two investment banks, [[Morgan Stanley]] and [[Goldman Sachs]], opted to become commercial banks, thereby subjecting themselves to more stringent regulation.<ref>{{cite news |url=https://www.nytimes.com/2008/10/03/business/03sec.html |title=Agency's '04 Rule Let Banks Pile Up New Debt, and Risk |work=The New York Times |first=Stephen |last=Labaton |date=October 3, 2008 |access-date=May 24, 2010}}</ref><ref>{{cite news |first1=Stephen |last1=Labaton |first2=Amy |last2=O'Leary |url=https://www.nytimes.com/interactive/2008/09/28/business/20080928-SEC-multimedia/index.html |title=The Day the S.E.C. Changed the Game |work=[[The New York Times]] |date=September 28, 2008 |access-date=November 20, 2012}}</ref>

In the years leading up to the crisis, the top four U.S. depository banks moved an estimated $5.2 trillion in assets and liabilities [[off-balance sheet]] into [[special purpose vehicles]] or other entities in the [[shadow banking system]]. This enabled them to essentially bypass existing regulations regarding minimum capital ratios, thereby increasing leverage and profits during the boom but increasing losses during the crisis. New accounting guidance will require them to put some of these assets back onto their books during 2009, which will significantly reduce their capital ratios. One news agency estimated this amount to be between $500 billion and $1 trillion. This effect was considered as part of the stress tests performed by the government during 2009.<ref>{{cite news |first=David |last=Reilly |url=https://www.bloomberg.com/apps/news?pid=20601039&sid=akv_p6LBNIdw&refer=home |title=Banks' Hidden Junk Menaces $1 Trillion Purge: David Reilly |publisher=Bloomberg |date=March 25, 2009 |access-date=November 20, 2012 |archive-url=https://web.archive.org/web/20120506132311/http://www.bloomberg.com/apps/news?pid=newsarchive&sid=akv_p6LBNIdw&refer=home |archive-date=May 6, 2012 }}</ref>

[[Martin Wolf]] wrote in June 2009: "...an enormous part of what banks did in the early part of this decade – the off-balance-sheet vehicles, the derivatives and the 'shadow banking system' itself – was to find a way round regulation."<ref>{{cite web |last=Wolf |first=Martin |url=http://www.ft.com/cms/s/0/095722f6-6028-11de-a09b-00144feabdc0.html |title=Reform of regulation has to start by altering incentives |publisher=FT.com |date=June 23, 2009 |access-date=November 20, 2012}}</ref>

The New York State Comptroller's Office has said that in 2006, Wall Street executives took home bonuses totaling $23.9 billion (~${{Format price|{{Inflation|index=US-GDP|value=23900000000|start_year=2006}}}} in {{Inflation/year|US-GDP}}). "Wall Street traders were thinking of the bonus at the end of the year, not the long-term health of their firm. The whole system – from mortgage brokers to Wall Street risk managers – seemed tilted toward taking short-term risks while ignoring long-term obligations. The most damning evidence is that most of the people at the top of the banks didn't really understand how those [investments] worked."<ref name="businessweek1" /><ref>{{cite news |url=https://www.nytimes.com/2009/02/21/business/21nocera.html?pagewanted=all |title=Fixing Wall Street Should Start With the Bonuses |first=Joe |last=Nocera |newspaper=The New York Times |date=February 20, 2009 |access-date=October 5, 2017 }}</ref>

The incentive compensation of traders was focused on fees generated from assembling financial products, rather than the performance of those products and profits generated over time. Their bonuses were heavily skewed towards cash rather than stock and not subject to "[[clawback|claw-back]]" (recovery of the bonus from the employee by the firm) in the event the MBS or CDO created did not perform. In addition, the increased risk (in the form of financial leverage) taken by the major investment banks was not adequately factored into the compensation of senior executives.<ref>{{cite news |url=https://www.nytimes.com/2008/12/18/business/18pay.html |title=On Wall Street, Bonuses, Not Profits, Were Real |first=Louise |last=Story |newspaper=The New York Times |date=December 17, 2008 |access-date=October 5, 2017 }}</ref>

====Credit default swaps====
[[Credit default swaps]] (CDS) are financial instruments used as a hedge and protection for debtholders, in particular MBS investors, from the risk of default, or by speculators to profit from default. As the net worth of banks and other financial institutions deteriorated because of losses related to subprime mortgages, the likelihood increased that those providing the protection would have to pay their counterparties. This created uncertainty across the system, as investors wondered which companies would be required to pay to cover mortgage defaults.

Like all [[swap (finance)|swaps]] and other [[financial derivatives]], CDS may either be used to [[Hedge (finance)|hedge]] risks (specifically, to insure creditors against default) or to profit from speculation. The volume of CDS outstanding increased 100-fold from 1998 to 2008, with estimates of the debt covered by CDS contracts, as of November 2008, ranging from US$33 to $47 trillion.<ref>Goel, S., ''Crisis Management'' ([[New Delhi]]: Global India Publications, 2009), [https://books.google.com/books?id=3eua8cb24LAC&pg=PA73 p. 73].</ref>{{rp|73}} CDS are lightly regulated, largely because of the [[Commodity Futures Modernization Act of 2000]]. As of 2008, there was no central [[Clearing house (finance)|clearing house]] to honor CDS in the event a party to a CDS proved unable to perform his obligations under the CDS contract. Required disclosure of CDS-related obligations has been criticized as inadequate. Insurance companies such as [[American International Group]] (AIG), [[MBIA]], and [[Ambac]] faced ratings downgrades because widespread mortgage defaults increased their potential exposure to CDS losses. These firms had to obtain additional funds (capital) to offset this exposure. AIG's having CDSs insuring $440 billion of MBS resulted in its seeking and obtaining a Federal government bailout.<ref>{{cite news |url=https://www.bloomberg.com/apps/news?pid=20601109&sid=aKKRHZsxRvWs&refer=home |title=Bloomberg-Credit Swap Disclosure Obscures True Financial Risk |publisher=Bloomberg.com |date=November 6, 2008 |access-date=February 27, 2009 |archive-url=https://web.archive.org/web/20121023073129/http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aKKRHZsxRvWs&refer=home |archive-date=October 23, 2012 }}</ref> The monoline insurance companies went out of business in 2008–2009.

When investment bank [[Lehman Brothers]] went bankrupt in September 2008, there was much uncertainty as to which financial firms would be required to honor the CDS contracts on its $600 billion (~${{Format price|{{Inflation|index=US-GDP|value=600000000000|start_year=2008}}}} in {{Inflation/year|US-GDP}}) of bonds outstanding.<ref>{{cite news |url=http://www.ibtimes.com/articles/20081010/lehman-debt-auction-gives-clue-to-potential-losses.htm |title=AP – Lehman Debt Auction Gives Clue to Potential Losses |agency=Associated Press |first=Stephen |last=Bernard |date=October 10, 2008 |archive-url=https://web.archive.org/web/20081023210041/http://www.ibtimes.com/articles/20081010/lehman-debt-auction-gives-clue-to-potential-losses.htm |archive-date=October 23, 2008 }}</ref><ref>{{cite web |url=http://www.secinfo.com/d11MXs.t1C1k.htm#1stPage |title=Lehman 10Q May 08 |publisher=Lehman Brothers}}</ref>
[[Merrill Lynch]]'s large losses in 2008 were attributed in part to the drop in value of its unhedged portfolio of [[collateralized debt obligation]]s (CDOs) after [[AIG]] ceased offering CDS on Merrill's CDOs. The loss of confidence of trading partners in Merrill Lynch's solvency and its ability to refinance its [[short-term debt]] led to its acquisition by the [[Bank of America]].<ref name="NYT-Morgenson-2008-11-08">
{{cite news |first=Gretchen |last=Morgenson |title=The Reckoning: How the Thundering Herd Faltered and Fell |date=November 8, 2008 |url=https://www.nytimes.com/2008/11/09/business/09magic.html |work=[[The New York Times]] |access-date=November 13, 2008 |quote=Some banks were so concerned that they considered stopping trading with Merrill if Lehman went under, according to participants in the Federal Reserve's weekend meetings on Sept. 13 and 14 [2008].}}
</ref><ref name="Bloomberg-Paulden-2008-08-26">
{{cite news |first=Pierre |last=Paulden |title=Merrill, Wachovia Hit With Record Refinancing Bill (Update1) |date=August 26, 2008 |publisher=Bloomberg.com |url=https://www.bloomberg.com/apps/news?pid=20601087&sid=a7snTaUmiwnw |work=Bloomberg News |access-date=November 12, 2008 |quote=In response to a slump in demand for their bonds, financial firms, which have incurred $504 billion of writedowns and credit losses since the start of 2007, are selling assets such as mortgage securities and collateralized debt obligations at fire- sale prices to pay down looming maturities. |archive-url=https://web.archive.org/web/20081116003829/http://www.bloomberg.com/apps/news?pid=20601087 |archive-date=November 16, 2008 }}</ref>

Economist [[Joseph Stiglitz]] summarized how credit default swaps contributed to the systemic meltdown: "With this complicated intertwining of bets of great magnitude, no one could be sure of the financial position of anyone else-or even of one's own position. Not surprisingly, the credit markets froze."<ref>{{cite magazine |last=Stiglitz |first=Joseph E. |url=https://www.vanityfair.com/magazine/2009/01/stiglitz200901 |title=Capitalist Fools |magazine=Vanity Fair |date=January 2009 |access-date=February 27, 2009 |archive-date=January 29, 2015 |archive-url=https://web.archive.org/web/20150129172732/http://www.vanityfair.com/magazine/2009/01/stiglitz200901 |url-status=dead }}</ref>

Author [[Michael Lewis]] wrote that CDS enabled speculators to stack bets on the same mortgage bonds and CDO's. This is analogous to allowing many persons to buy insurance on the same house. Speculators that bought CDS insurance were betting that significant defaults would occur, while the sellers (such as [[AIG]]) bet they would not. A theoretically infinite amount could be wagered on the same housing-related securities, provided buyers and sellers of the CDS could be found.<ref>{{cite magazine |url=https://www.vanityfair.com/business/features/2010/04/wall-street-excerpt-201004 |title=Betting on the Blind Side |first=Michael |last=Lewis |magazine=Vanity Fair |date=March 2010 |issue=April |access-date=October 5, 2017}}</ref>

Derivatives such as CDS were unregulated or barely regulated. Several sources have noted the failure of the US government to supervise or even require transparency of the [[financial instruments]] known as [[derivative (finance)|derivatives]].<ref>[https://www.pbs.org/wgbh/pages/frontline/warning/ The Warning]| Frontline</ref><ref name="devils" /><ref name="faiola" />
A 2008 investigative article in ''[[The Washington Post]]'' found that leading government officials at the time (Federal Reserve Board Chairman [[Alan Greenspan]], Treasury Secretary [[Robert Rubin]], and [[U.S. Securities and Exchange Commission|SEC]] Chairman [[Arthur Levitt]]) vehemently opposed any regulation of derivatives. In 1998 [[Brooksley E. Born]], head of the [[Commodity Futures Trading Commission]], put forth a policy paper asking for feedback from regulators, lobbyists, legislators on the question of whether derivatives should be reported, sold through a central facility, or whether capital requirements should be required of their buyers. Greenspan, Rubin, and Levitt pressured her to withdraw the paper and Greenspan persuaded [[United States Congress|Congress]] to pass a resolution preventing CFTC from regulating derivatives for another six months – when Born's term of office would expire.<ref name="devils">McLean, Bethany and Joe Nocera, ''All the Devils Are Here, the Hidden History of the Financial Crisis'' Portfolio, Penguin, 2010, pp. 104–07</ref>
Ultimately, it was the collapse of a specific kind of derivative, the [[mortgage-backed security]], that triggered the economic crisis of 2008.<ref name="faiola">{{cite news |url=https://www.washingtonpost.com/wp-dyn/content/article/2008/10/14/AR2008101403343.html?hpid=topnews&sid=ST2008101403344&s_pos= |title=What Went Wrong |first1=Anthony |last1=Faiola |first2=Ellen |last2=Nakashima |first3=Jill |last3=Drew |date=October 15, 2008 |newspaper=The Washington Post |access-date=April 10, 2009}}</ref>

In addition, Chicago Public Radio, Huffington Post, and ProPublica reported in April 2010 that market participants, including a hedge fund called [[Magnetar Capital]], encouraged the creation of CDO's containing low quality mortgages, so they could bet against them using CDS. NPR reported that Magnetar encouraged investors to purchase CDO's while simultaneously betting against them, without disclosing the latter bet.<ref name="propublica.org" /><ref>{{cite web |url=https://www.huffingtonpost.com/yves-smith/rahm-emanuel-and-magnetar_b_535827.html |title=Rahm Emanuel and Magnetar Capital: The Definition of Compromised |first=Yves |last=Smith |website=[[HuffPost]] |date=June 13, 2010 |access-date=October 5, 2017}}</ref><ref>{{cite web |url=http://www.thisamericanlife.org/radio-archives/episode/405/inside-job |title=Inside Job |date=9 April 2010 |access-date=October 5, 2017}}</ref> Instruments called [[synthetic CDO]], which are portfolios of credit default swaps, were also involved in allegations by the SEC against Goldman-Sachs in April 2010.<ref>{{cite news |url=https://blogs.wsj.com/deals/2010/04/19/goldman-responds-again-to-sec-complaint/ |title=Goldman Responds Again to SEC Complaint |first=Michael |last=Corkery |newspaper=Wall Street Journal |date=April 19, 2010 |access-date=October 5, 2017}}</ref>

The [[Financial Crisis Inquiry Commission]] reported in January 2011 that CDS contributed significantly to the crisis. Companies were able to sell protection to investors against the default of mortgage-backed securities, helping to launch and expand the market for new, complex instruments such as CDO's. This further fueled the housing bubble. They also amplified the losses from the collapse of the housing bubble by allowing multiple bets on the same securities and helped spread these bets throughout the financial system. Companies selling protection, such as [[AIG]], were not required to set aside sufficient capital to cover their obligations when significant defaults occurred. Because many CDS were not traded on exchanges, the obligations of key financial institutions became hard to measure, creating uncertainty in the financial system.{{sfn|FCIC|2011}}

====Inaccurate credit ratings====
{{Main|Credit rating agencies and the subprime crisis}}

[[File:MBS Downgrades Chart.png|thumb|upright=1.6|[[Mortgage-backed security|MBS]] credit rating downgrades, by quarter]]
Credit rating agencies – firms which rate debt [[Financial instrument|instruments]]/[[securities]] according to the debtor's ability to pay lenders back – have come under scrutiny during and after the financial crisis for having given investment-grade ratings to MBSs and CDOs based on risky subprime mortgage loans that later defaulted. Dozens of lawsuits have been filed by investors against the "[[Big Three (credit rating agencies)|Big Three]]" rating agencies – [[Moody's Investors Service]], [[Standard & Poor's]] and [[Fitch Ratings]].<ref name="dozens">{{cite news |title=S&P Lawsuit First Amendment Defense May Fare Poorly, Experts Say |url=https://huffingtonpost.com/2013/02/04/sp-lawsuit-first-amendment_n_2618737.html |date=February 4, 2013 |publisher=[[HuffPost]] |access-date=September 4, 2013 |quote=Investors, including public pension funds and foreign banks, lost hundreds of billions of dollars, and have since filed dozens of lawsuits against the agencies.}}</ref> The [[Financial Crisis Inquiry Commission]] (FCIC) concluded the "failures" of the Big Three rating agencies were "essential cogs in the wheel of financial destruction" and "key enablers of the financial meltdown".{{sfn|FCIC|2011}} Economist [[Joseph Stiglitz]] called them "one of the key culprits" of the financial crisis.<ref>[https://www.theguardian.com/business/2011/aug/22/ratings-agencies-conflict-of-interest Ratings agencies suffer 'conflict of interest', says former Moody's boss]| Rupert Neate| The Guardian| August 22, 2011</ref> Others called their ratings "catastrophically misleading", (the [[U.S. Securities and Exchange Commission]]er<ref name="casey">{{cite web |last=Casey |first=Kathleen |title="In Search of Transparency, Accountability, and Competition: The Regulation of Credit Rating Agencies", remarks at "The SEC Speaks in 2009" |url=https://www.sec.gov/news/speech/2009/spch020609klc.htm |date=February 6, 2009 |publisher=US SEC |access-date=August 21, 2013}}</ref>), their performance "horrendous" (''[[The Economist]]'' magazine<ref name="econ">{{cite news |last=TE |title=Free speech or knowing misrepresentation? |newspaper=[[The Economist]]|date=February 5, 2013 |url=https://www.economist.com/blogs/schumpeter/2013/02/rating-agencies}}</ref>). There are indications that some involved in rating subprime-related securities knew at the time that the rating process was faulty.<ref>{{cite web |work=US House of Representatives Committee on Government Oversight and Reform |title=Committee Holds Hearing on the Credit Rating Agencies and the Financial Crisis |date=October 22, 2008 |url=http://oversight.house.gov/index.php?option=com_content&task=view&id=3437&Itemid=2 |access-date=July 9, 2010}}</ref><ref>{{cite web |url=https://finance.yahoo.com/news/the-last-mystery-of-the-financial-crisis-154447818.html?page=1 |title=The Last Mystery of the Financial Crisis |date=21 June 2013 |access-date=October 5, 2017}}</ref>

The position of the three agencies "between the issuers and the investors of securities"{{sfn|FCIC|2011|pp=43–44}} "transformed" them into "key" players in the housing bubble and financial crisis according to the ''Financial Crisis Inquiry Report''. Most investors in the fixed income market had no experience with the mortgage business – let alone dealing with the complexity of pools of mortgages and tranche priority of MBS and CDO securities – and were simply looking for an independent party who could rate securities.{{sfn|FCIC|2011|p=44}} The putatively independent parties meanwhile were paid "handsome fees" by investment banks "to obtain the desired ratings", according to one expert.{{sfn|FCIC|2011|p=44}}

In addition, a large section of the debt securities market – many [[money market fund|money market]]s and [[pension fund]]s – were restricted in their bylaws to holding only the safest securities – i.e securities the rating agencies designated "triple-A". Hence non-prime securities could not be sold without ratings by (usually two of) the three agencies.<ref name="McLean p.111">McLean, Bethany and Joe Nocera. ''All the Devils Are Here, the Hidden History of the Financial Crisis'', Portfolio, Penguin, 2010 (p. 111)</ref>

From 2000 to 2007, one of the largest agencies – Moody's – rated nearly 45,000 mortgage-related securities<ref name="nber" /> – more than half of those it rated – as triple-A.{{sfn|FCIC|2011|p=xxv}} By December 2008, there were over $11 (~${{Format price|{{Inflation|index=US-GDP|value=11|start_year=2008}}}} in {{Inflation/year|US-GDP}}) trillion structured finance securities outstanding in the U.S. bond market debt.<ref name="nber">{{cite web |first1=Efraim |last1=Benmelech |first2=Jennifer |last2=Dlugosz |title=The Credit Rating Crisis |url=https://www.nber.org/chapters/c11794.pdf |work=NBER Macroeconomics Annual 2009 |publisher=National Bureau of Economic Research, NBER Macroeconomics Annual |volume=24 |year=2009}}</ref> But as the boom matured, mortgage underwriting standards deteriorated. By 2007 an estimated $3.2 (~${{Format price|{{Inflation|index=US-GDP|value=3200000000000|start_year=2007}}}} in {{Inflation/year|US-GDP}}) trillion in loans were made to homebuyers and owners with bad credit and undocumented incomes, bundled into MBSs and CDOs, and given top ratings<ref name="loose" /> to appeal to global investors.

As these mortgages began to default, the three agencies were compelled to go back and redo their ratings. Between autumn of 2007 and the middle of 2008, agencies downgraded nearly $2 trillion in MBS tranches.<ref>{{cite news |url=https://money.cnn.com/2008/08/04/magazines/fortune/whitney_feature.fortune/index.htm |title=The woman who called Wall Street's meltdown |work=Fortune |date=August 6, 2008 |access-date=May 24, 2010 |first=Jon |last=Birger |quote=[Between Q3 2007 and Q2 2008, rating agencies lowered the credit ratings on $1.9 trillion in [[mortgage-backed securities]] ]}}</ref> By the end of 2008, 80% of the CDOs by value<ref>worth $300 billion (~${{Format price|{{Inflation|index=US-GDP|value=300000000000|start_year=2008}}}} in {{Inflation/year|US-GDP}})</ref> rated "triple-A" were downgraded to junk.{{sfn|FCIC|2011|p=224;229}} Bank writedowns and losses on these investments totaled $523 billion.<ref name="loose">[https://www.bloomberg.com/apps/news?pid=20601109&sid=ah839IWTLP9s Bloomberg-Smith-Bringing Down Ratings Let Loose Subprime Scourge] {{webarchive|url=https://web.archive.org/web/20100603213309/http://www.bloomberg.com/apps/news?pid=20601109 |date=June 3, 2010 }}| By Elliot Blair Smith | bloomberg.com| September 24, 2008</ref><ref name="scourge-gold">{{cite journal |last=Smith |first=Elliot Blair |title=Bringing Down Wall Street as Ratings Let Loose Subprime Scourge |journal=Bloomberg |date=September 24, 2008 |url=https://www.bloomberg.com/apps/news?pid=newsarchive&sid=ah839IWTLP9s |quote=Without those AAA ratings, the gold standard for debt, banks, insurance companies and pension funds wouldn't have bought the products. Bank writedowns and losses on the investments totaling $523.3 billion led to the collapse or disappearance of Bear Stearns Cos., Lehman Brothers Holdings Inc. and Merrill Lynch & Co. and compelled the Bush administration to propose buying $700 billion of bad debt from distressed financial institutions.}}</ref><ref name="bottom">[https://www.bloomberg.com/apps/news?pid=20601109&sid=ax3vfya_Vtdo Bloomberg-Smith-Race to Bottom at Rating Agencies Secured Subprime Boom, Bust] {{webarchive|url=https://web.archive.org/web/20100603213309/http://www.bloomberg.com/apps/news?pid=20601109 |date=June 3, 2010 }}| By Elliot Blair Smith | bloomberg.com| September 25, 2008</ref>

Critics such as the FCIC argue the mistaken credit ratings stemmed from "flawed computer models, the pressure from financial firms that paid for the ratings, the relentless drive for market share, the lack of resources to do the job despite record profits, and the absence of meaningful public oversight".{{sfn|FCIC|2011}}

Structured investment was very profitable to the agencies and by 2007 accounted for just under half of Moody's total ratings revenue and all of the revenue growth.<ref>McLean, and Nocera. ''All the Devils Are Here'', 2010 (p. 124)</ref> But profits were not guaranteed, and issuers played the agencies off one another, 'shopping' around to find the best ratings, sometimes openly threatening to cut off business after insufficiently generous ratings.<ref name="shopping">{{cite book |first1=Bethany |last1=McLean |first2=Joe |last2=Nocera |title=All the Devils Are Here |url=https://archive.org/details/alldevilsarehere00mcle |url-access=registration |year=2010 |publisher=Penguin |page=[https://archive.org/details/alldevilsarehere00mcle/page/118 118] |isbn=978-1-59184-363-4 |quote=[Example from page 118] UBS banker Rovert Morelli, upon hearing that S&P might be revising its RMSBS ratings, sent an e-mail to an S&P analyst. 'Heard your ratings could be 5 notches back of moddys [sic] equivalent, Gonna kill you resi biz. May force us to do moddyfitch only ...'}}</ref> Thus there was a conflict of interest between accommodating clients – for whom higher ratings meant higher earnings – and accurately rating the debt for the benefit of the debt buyer/investors – who provided zero revenue to the agencies.<ref>{{cite news |url=https://www.economist.com/finance/displaystory.cfm?story_id=9769471 |newspaper=The Economist |title=Credit and blame |date=September 6, 2007}}</ref>

Despite the profitability of the three big credit agencies – Moody's operating margins were consistently over 50%, higher than famously successful [[ExxonMobil]] or [[Microsoft]]<ref>McLean, Bethany and Joe Nocera, ''All the Devils Are Here, the Hidden History of the Financial Crisis'' Portfolio, Penguin, 2010 (p. 124)</ref> – salaries and bonuses for non-management were significantly lower than at Wall Street banks, and its employees complained of overwork.

This incentivized agency rating analysts to seek employment at those Wall Street banks who were issuing mortgage securities, and who were particularly interested in the analysts' knowledge of what criteria their former employers used to rate securities.<ref>{{cite book |last=Lewis |first=Michael |title=The Big Short: Inside the Doomsday Machine |year=2010 |publisher=WW Norton and Co |page=[https://archive.org/details/bigshortinsidedo0058lewi/page/156 156] |url=https://archive.org/details/bigshortinsidedo0058lewi |url-access=registration |quote=the "smartest" analysts at the credit rating agencies "leave for Wall Street firms where they could use their knowledge (of criteria used to rate securities) to manipulate the companies they used to work for."|isbn=978-0-393-33882-9 }}</ref>{{sfn|FCIC|2011|p=193}}
Inside knowledge of interest to security issuers eager to find loopholes included the fact that rating agencies looked at the ''average'' credit score of a pool of borrowers, but not how dispersed it was; that agencies ignored borrower's household income or length of credit history (explaining the large numbers of low income immigrants given mortgages—people "who had never failed to repay a debt, because they had never been given a loan"); that agencies were indifferent to credit worthiness issues of [[adjustable-rate mortgage]]s with low teaser rates, "silent second" mortgages, or [[No doc loan#In United States|no-documentation mortgages]].<ref name="short">{{cite book |last=Lewis |first=Michael |title=The Big Short: Inside the Doomsday Machine |year=2010 |publisher=WW Norton and Co |pages=[https://archive.org/details/bigshortinsidedo0058lewi/page/99 99]–100 |url=https://archive.org/details/bigshortinsidedo0058lewi|url-access=registration |quote=big short. |isbn=978-0-393-33882-9 }}</ref>

As of 2010, virtually all of the investigations of rating agencies, criminal as well as civil, are in their early stages.<ref>{{cite news |url=https://www.nytimes.com/2010/05/14/business/14banks.html?hp |date=May 13, 2010 |first1=Nelson D. |last1=Schwartz |first2=Eric |last2=Dash |newspaper=The New York Times |title=With Banks Under Fire, Some Expect a Settlement |access-date=April 20, 2013}}</ref> In New York, state prosecutors are examining whether eight banks<ref>[[Goldman Sachs]], [[Morgan Stanley]], [[UBS]], [[Citigroup]], [[Credit Suisse]], [[Deutsche Bank]], [[Crédit Agricole]] and [[Merrill Lynch]],</ref> duped the credit ratings agencies into inflating the grades of subprime-linked investments.<ref name="story">{{cite news |last=STORY |first=LOUISE |title=Prosecutors Ask if 8 Banks Duped Rating Agencies |url=https://www.nytimes.com/2010/05/13/business/13street.html?ref=business |access-date=October 5, 2013 |newspaper=[[New York Times]]|date=May 13, 2010}}</ref> In the dozens of suits filed against them by investors involving claims of inaccurate ratings<ref name="dozens" /> the rating agencies have defended themselves using the [[First Amendment]] defense—that a credit rating is an opinion protected as free speech.<ref name="nagy">{{cite web |last=Nagy |first=Theresa |title=Note, Credit Rating Agencies and the First Amendment: Applying Constitutional Journalistic Protections to Subprime Mortgage Litigation |url=http://www.minnesotalawreview.org/wp-content/uploads/2011/08/Nagy_MLR.pdf |work=2009 |publisher=Minnesota Law Review |access-date=September 4, 2013}}</ref> In 2013, McClatchy Newspapers found that "little competition has emerged" since the Credit Rating Agency Reform Act of 2006 was passed "in rating the kinds of complex home-mortgage securities whose implosion led to the 2007 financial crisis". The Big Three's market share of outstanding credit rating has barely shrunk, moving from 98% to 97%.<ref name="gordon">{{cite news |last=Gordon |first=Greg |title=Industry wrote provision that undercuts credit-rating overhaul |url=http://www.mcclatchydc.com/2013/08/07/198739/industry-wrote-provision-that.html#.Uidbt6ypeSo |access-date=September 4, 2013 |newspaper=McClatchy |date=August 7, 2013 |quote=Despite a barrage of criticism over their behavior, the three firms issued 97 percent of all ratings in the 12 months that ended in June 2011, according to the SEC's most recent publicly available data. |archive-url=https://web.archive.org/web/20130905063015/http://www.mcclatchydc.com/2013/08/07/198739/industry-wrote-provision-that.html#.Uidbt6ypeSo |archive-date=September 5, 2013 }}</ref>

===Governmental policies===
{{Main|Government policies and the subprime mortgage crisis}}
<!-- Update this main article first. -->Government over-regulation, failed regulation and deregulation have all been claimed as causes of the crisis. Increasing home ownership has been the goal of several presidents including Roosevelt, Reagan, Clinton and [[George W. Bush]].<ref>[https://georgewbush-whitehouse.archives.gov/news/releases/2002/10/20021015.html Whitehouse-President Hosts Conference on Minority Home Ownership], October 15, 2002</ref>

====Decreased regulation of financial institutions====
{{quote box
|quote=Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief.| source = [[Alan Greenspan]]<ref name="Greenspan_2008">{{cite news|url=https://www.nytimes.com/2008/10/24/business/economy/24panel.html|title=Greenspan Concedes Error on Regulation|first=Edmund L.|last=Andrews|newspaper=The New York Times|date=23 October 2008}}</ref>|width = 350px}}

Several steps were taken to [[deregulate]] banking institutions in the years leading up to the crisis. Further, major investment banks which collapsed during the crisis were not subject to the regulations applied to depository banks. In testimony before Congress both the [[Securities and Exchange Commission]] (SEC) and [[Alan Greenspan]] claimed failure in allowing the self-regulation of investment banks.<ref>{{cite news |url=https://www.nytimes.com/2008/09/27/business/27sec.html?em |title=SEC Concedes Oversight Flaws |work=The New York Times |first=Stephen |last=Labaton |date=September 27, 2008 |access-date=May 24, 2010}}</ref><ref>{{cite news |url=https://www.nytimes.com/2008/10/03/business/03sec.html?em |title=The Reckoning |work=The New York Times |first=Stephen |last=Labaton |date=October 3, 2008 |access-date=May 24, 2010}}</ref>

In 1982, Congress passed the [[Alternative Mortgage Transaction Parity Act of 1982|Alternative Mortgage Transactions Parity Act]] (AMTPA), which allowed non-federally chartered housing creditors to write adjustable-rate mortgages. This bi-partisan legislation was, according to the Urban Institute, intended to "increase the volume of loan products that reduced the up-front costs to borrowers in order to make homeownership more affordable."<ref>Kenneth Temkin and Jennifer Johnson and Diane Levy, "Subprime Markets, the Role of GSEs and Risk-Based Pricing," (Washington, DC: Urban Institute, March 2002), 8.</ref> Among the new mortgage loan types created and gaining in popularity in the early 1980s were adjustable-rate, option adjustable-rate, balloon-payment and interest-only mortgages. Subsequent widespread abuses of predatory lending occurred with the use of adjustable-rate mortgages.<ref name="The downturn in facts and figures"/><ref>{{cite news |url=https://money.cnn.com/2008/01/30/real_estate/congress_subprime.fortune/ |title=How Congress helped create the subprime mess |publisher=CNNMoney.com |first=Jon |last=Birger |date=January 31, 2008 |access-date=April 2, 2009 |archive-url=https://web.archive.org/web/20090425222614/http://money.cnn.com/2008/01/30/real_estate/congress_subprime.fortune/ |archive-date=April 25, 2009 }}</ref> Approximately 90% of subprime mortgages issued in 2006 were adjustable-rate mortgages.<ref name="Zandi 2010"/>

The [[Glass–Steagall Act]] was enacted after the [[Great Depression]]. It separated [[commercial bank]]s and [[investment bank]]s, in part to avoid potential conflicts of interest between the lending activities of the former and rating activities of the latter. In 1999 Glass–Steagall was repealed by the [[Gramm-Leach-Bliley Act]]. Economist [[Joseph Stiglitz]] criticized the repeal of Glass–Steagall because, in his opinion, it enabled the risk-taking culture of investment banking to dominate the more conservative commercial banking culture, leading to increased levels of risk-taking and leverage during the boom period.<ref name="vanityfair.com">{{cite magazine |url=https://www.vanityfair.com/magazine/2009/01/stiglitz200901 |title=Joseph E. Stiglitz on capitalist fools |first=Joseph E. |last=Stiglitz |magazine=Vanity Fair |date=9 December 2008 |issue=January |access-date=October 5, 2017 |archive-date=29 January 2015 |archive-url=https://web.archive.org/web/20150129172732/http://www.vanityfair.com/magazine/2009/01/stiglitz200901 |url-status=dead }}</ref> President Bill Clinton, who signed the legislation, dismissed its connection to the subprime mortgage crisis, stating (in 2008): "I don't see that signing that bill had anything to do with the current crisis."<ref>Joseph Fried, Who Really Drove the Economy Into the Ditch? (New York, NY: Algora Publishing, 2012), pp.289–90.</ref>

The [[Commodity Futures Modernization Act of 2000]] was bi-partisan legislation that formally exempted [[Derivative (finance)|derivatives]] from regulation, supervision, trading on established exchanges, and capital reserve requirements for major participants. It "provided a legal safe harbor for treatment already in effect."<ref>Joseph Fried, Who Really Drove the Economy Into the Ditch? (New York, NY: Algora Publishing, 2012), p. 218.</ref> Concerns that counterparties to derivative deals would be unable to pay their obligations caused pervasive uncertainty during the crisis. Particularly relevant to the crisis are [[credit default swaps]] (CDS), a derivative in which Party A pays Party B what is essentially an insurance premium, in exchange for payment should Party C default on its obligations. [[Warren Buffett]] famously referred to derivatives as "financial weapons of mass destruction" in early 2003.<ref>{{cite news |url=https://www.economist.com/finance/displayStory.cfm?story_id=12274112 |title=Derivatives: A nuclear winter? |newspaper=The Economist |date=September 20, 2008 |access-date=November 20, 2012}}</ref><ref>{{cite news |url=http://news.bbc.co.uk/2/hi/business/2817995.stm |title=Business &#124; Buffett warns on investment 'time bomb' |work=BBC News |date=March 4, 2003 |access-date=November 20, 2012}}</ref>

Former Fed Chair [[Alan Greenspan]], who many economists blamed for the financial crisis, testified in October 2008 that he had trusted free markets to self-correct and had not anticipated the risk of reduced lending standards."Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief."<ref name="Greenspan_2008"/>

Some analysts believe the subprime mortgage crisis was due, in part, to a 2004 decision of the SEC that affected 5 large investment banks. The critics believe that changes in the [[net capital rule|capital reserve calculation rules]] enabled investment banks to substantially increase the level of debt they were taking on, fueling the growth in mortgage-backed securities supporting subprime mortgages. These banks dramatically increased their risk taking from 2003 to 2007. By the end of 2007, the largest five U.S. investment banks had over $4 (~${{Format price|{{Inflation|index=US-GDP|value=4000000000000|start_year=2007}}}} in {{Inflation/year|US-GDP}}) trillion in debt with high ratios of debt to equity, meaning only a small decline in the value of their assets would render them insolvent.<ref name="Labaton">{{cite news |url=https://www.nytimes.com/2008/09/27/business/27sec.html?em |title=SEC Concedes Oversight Flaws |work=The New York Times |first=Stephen |last=Labaton |date=September 27, 2008 |access-date=May 4, 2010}}</ref><ref name="NYTS">{{cite news |url=https://www.nytimes.com/2008/10/03/business/03sec.html |title=Agency's '04 Rule Let Banks Pile Up New Debt, and Risk |work=The New York Times |first=Stephen |last=Labaton |date=October 3, 2008 |access-date=May 4, 2010}}</ref> However, in an April 9, 2009, speech, Erik Sirri, then director of the SEC's Division of Trading and Markets, argued that the regulatory weaknesses in leverage restrictions originated in the late 1970s: "The Commission did not undo any leverage restrictions in 2004," nor did it intend to make a substantial reduction.<ref name=Fried257>Joseph Fried, ''Who Really Drove the Economy Into the Ditch?'' (New York, NY: Algora Publishing, 2012), p. 258.</ref>

The financial sector invested heavily to gain clout in the halls of government to bring about these major deregulatory objectives: it spent more than $5 billion over a decade to strengthen its political clout in Washington, DC, including $1.725 billion in political [[campaign contribution]]s and $3.4 billion on [[Industry lobbyist]]s during the years 1998–2008.<ref>Wall Street Watch, March 4, 2009, [http://www.wallstreetwatch.org/soldoutreport.htm "$5 Billion in Political Contributions Bought Wall Street Freedom From Regulation, Restrain, Report Finds"]</ref>

====Policies to promote private ownership of housing====
{{quote box
| width = 350px
| quote = "Members of the Right tried to blame the seeming market failures on government; in their mind the government effort to push people with low incomes into home ownership was the source of the problem. Widespread as this belief has become in conservative circles, virtually all serious attempts to evaluate the evidence have concluded that there is little merit in this view."
| source = [[Joseph Stiglitz]]<ref>{{cite web |author=Stiglitz, Joseph |date=June 2012 |title=We've been brainwashed |url=http://www.salon.com/2012/06/14/weve_been_brainwashed/ |access-date=November 17, 2014 |publisher=[[Salon Magazine]]}}</ref>
}}
Several administrations, both Democratic and Republican, advocated private home ownership in the years leading up to the crisis. The [[Housing and Community Development Act of 1992]] established, for the first time, a mandate to Fannie Mae and Freddie Mac for loans to enable home ownership of less expensive housing, a mandate to be regulated by the [[Department of Housing and Urban Development]] (HUD). Initially, the 1992 legislation required that 30% or more of Fannie's and Freddie's loan purchases be in support of private home ownership of affordable housing. However, HUD was given the power to set future requirements. During the later part of the [[Clinton administration]], HUD Secretary [[Andrew Cuomo]] announced "new regulations to provide $2.4 trillion in mortgages for affordable housing for 28.1 million families, which increased the required percentage of mortgage loans for low- and moderate-income families that finance companies Fannie Mae and Freddie Mac must buy annually from the then current 42% of their total purchases to a new high of 50%.<ref>{{Cite web|url=https://archives.hud.gov/news/2000/pr00-317.html|title=HUD Archives: HUD Announces New Regulations To Provide $2.4 Trillion In Mortgages For Affordable Housing For 28.1 Million Families}}</ref> Eventually (under the Bush administration) a 56% minimum was established.<ref>{{Cite web|url=https://archives.hud.gov/news/2004/pr04-133.cfm|title=HUD Archives: HUD FINALIZES RULE ON NEW HOUSING GOALS FOR FANNIE MAE AND FREDDIE MAC}}</ref> Additionally, in 2003, "The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago."<ref>{{cite news |url=https://www.nytimes.com/2003/09/11/business/new-agency-proposed-to-oversee-freddie-mac-and-fannie-mae.html |title=New Agency Proposed to Oversee Freddie Mac and Fannie Mae |first=Stephen |last=Labaton |newspaper=The New York Times |date=September 11, 2003 |access-date=October 5, 2017 }}</ref>

"The National Homeownership Strategy: Partners in the American Dream", was compiled in 1995 by Henry Cisneros, President Clinton's HUD Secretary. This 100-page document represented the viewpoints of HUD, Fannie Mae, Freddie Mac, leaders of the housing industry, various banks, numerous activist organizations such as [[Association of Community Organizations for Reform Now|ACORN]] and [[National Council of La Raza|La Raza]], and representatives from several state and local governments."<ref>Joseph Fried, Who Really Drove the Economy Into the Ditch? (New York, NY: Algora Publishing, 2012), 9.</ref> In 2001, the independent research company, Graham Fisher & Company, stated: "While the underlying initiatives of the [strategy] were broad in content, the main theme … was the relaxation of credit standards."<ref>{{cite SSRN |title=Housing in the New Millennium: A Home without Equity Is Just a Rental with Debt |first=Graham |last=Fisher |date=June 29, 2001 |ssrn=1162456 }}</ref>

The Financial Crisis Inquiry Commission (majority report), Federal Reserve economists, and several academic researchers have stated that government affordable housing policies were not the major cause of the financial crisis.<ref name=ssrn /><ref name="Regulation and the Mortgage Crisis"/> They also state that Community Reinvestment Act loans outperformed other "subprime" mortgages, and [[Government-sponsored enterprise|GSE]] mortgages performed better than private label securitizations.

=====Community Reinvestment Act=====
The [[Community Reinvestment Act]] (CRA) was originally enacted under President [[Jimmy Carter]] in 1977 in an effort to encourage banks to halt the practice of lending discrimination.<ref>Berry, M., & Romero, J., [https://www.federalreservehistory.org/essays/community_reinvestment_act "Community Reinvestment Act of 1977"], federalreservehistory.org.</ref> In 1995 the Clinton administration issued regulations that added numerical guidelines, urged lending flexibility, and instructed bank examiners to evaluate a bank's responsiveness to community activists (such as [[Association of Community Organizations for Reform Now|ACORN]]) when deciding whether to approve bank merger or expansion requests.<ref name=fragile>{{cite book |title=Fragile by Design |author=Charles W. Calomiris |author2=Stephen Haber |year=2014 |publisher=Princeton University Press |isbn=978-0-691-15524-1 |pages=216–26|author2-link=Stephen Haber }}</ref> Critics claim that the 1995 changes to CRA signaled to banks that relaxed lending standards were appropriate and could minimize potential risk of governmental sanctions.

In its "Conclusions" submitted January 2011, the [[Financial Crisis Inquiry Commission]] reported that
<blockquote>"the CRA was not a significant factor in subprime lending or the crisis. Many subprime lenders were not subject to the CRA. Research indicates only 6% of high-cost loans—a proxy for subprime loans—had any connection to the law. Loans made by CRA-regulated lenders in the neighborhoods in which they were required to lend were half as likely to default as similar loans made in the same neighborhoods by independent mortgage originators not subject to the law."{{sfn|FCIC|2011|p=xxvii}}</blockquote> Critics claim that the use of the high-interest-rate proxy distorts results because government programs generally promote low-interest rate loans—even when the loans are to borrowers who are clearly subprime.<ref>Joseph Fried, Who Really Drove the Economy Into the Ditch? (New York, NY: Algora Publishing, 2012), p. 141.</ref> However, several economists maintain that Community Reinvestment Act loans outperformed other "subprime" mortgages, and GSE mortgages performed better than private label securitizations.<ref name=ssrn /><ref name="Regulation and the Mortgage Crisis"/>

However, economists at the [[National Bureau of Economic Research]] (NBER) concluded that banks undergoing CRA-related regulatory exams took additional mortgage lending risk. The authors of a study entitled "Did the Community Reinvestment Act Lead to Risky Lending?" compared "the lending behavior of banks undergoing CRA exams within a given census tract in a given month (the treatment group) to the behavior of banks operating in the same census tract-month that did not face these exams (the control group). This comparison clearly indicates that adherence to the CRA led to riskier lending by banks." They concluded: "The evidence shows that around CRA examinations, when incentives to conform to CRA standards are particularly high, banks not only increase lending rates but also appear to originate loans that are markedly riskier." Loan delinquency averaged 15% higher in the treatment group than the control group one year after mortgage origination.<ref>{{cite web |url=https://www.nber.org/digest/may13/w18609.html |title=NBER-Agarwal, Benmelich, Bergman, Seru-"Did the Community Reinvestment Act Lead to Risky Lending?" |access-date=October 5, 2017}}</ref>

====State and local governmental programs====
As part of the 1995 National Homeownership Strategy, HUD advocated greater involvement of state and local organizations in the promotion of affordable housing.<ref>United States. Dept. of Housing and Urban Development, The National Homeownership Strategy : Partners in the American Dream (Washington, D.C.: U.S. Dept. of Housing and Urban Development, 1995), 1–1.</ref> In addition, it promoted the use of low or no-down payment loans and second, unsecured loans to the borrower to pay their down payments (if any) and closing costs.<ref>Joseph Fried, Who Really Drove the Economy Into the Ditch? (New York, NY: Algora Publishing, 2012), pp. 11–12.</ref> This idea manifested itself in "silent second" loans that became extremely popular in several states such as California, and in scores of cities such as San Francisco.<ref>Joseph Fried, Who Really Drove the Economy Into the Ditch? (New York, NY: Algora Publishing, 2012), p. 47.</ref> Using federal funds and their own funds, these states and cities offered borrowers loans that would defray the cost of the down payment. The loans were called "silent" because the primary lender was not supposed to know about them. A Neighborhood Reinvestment Corporation (affiliated with HUD) publicity sheet explicitly described the desired secrecy: "[The NRC affiliates] hold the second mortgages. Instead of going to the family, the monthly voucher is paid to [the NRC affiliates]. In this way the voucher is "invisible" to the traditional lender and the family (emphasis added)<ref>{{cite web |title=Neighborworks Organizations Use Section 8 Vouchers for Home Ownership: Fact Sheet |publisher=Neighborhood Reinvestment Corporation |date=September 3, 2004 |url=http://www.nw.org/network/comstrat/section8/documents/VoucherFactSheet.pdf |access-date=November 20, 2012 |archive-url=https://web.archive.org/web/20130512055711/http://www.nw.org/network/comstrat/section8/documents/VoucherFactSheet.pdf |archive-date=May 12, 2013 }}</ref>

===Role of Fannie Mae and Freddie Mac===
[[Fannie Mae]] and [[Freddie Mac]] are [[government-sponsored enterprise]]s (GSE) that purchase mortgages, buy and sell [[mortgage-backed securities]] (MBS), and guarantee nearly half of the mortgages in the U.S. A variety of political and competitive pressures resulted in the GSEs ramping up their purchase and guarantee of risky mortgages in 2005 and 2006, just as the housing market was peaking.{{sfn|FCIC|2011|p=xxvi}}<ref>{{cite news |last=Duhigg |first=Charles |url=https://www.nytimes.com/2008/10/05/business/05fannie.html?em=&pagewanted=print |title=The Reckoning – Pressured to Take More Risk, Fannie Reached Tipping Point – Series |newspaper=NYTimes.com |date=October 4, 2008 |access-date=November 20, 2012}}</ref> Fannie and Freddie were both under political pressure to expand purchases of higher-risk affordable housing mortgage types, and under significant competitive pressure from large investment banks and mortgage lenders.<ref name=Duhigg/>

As early as February 2004, in testimony before the U.S. Senate Banking Committee, Alan Greenspan (chairman of the Federal Reserve) raised serious concerns regarding the [[systemic risk|systemic financial risk]] that Fannie Mae and Freddie Mac represented. He implored Congress to take actions to avert a crisis.<ref>{{cite web |url=https://www.forbes.com/2004/02/24/cx_aw_0224greenspan.html#5d8e61cc24b5|title=Greenspan Concerned By Freddie, Fannie|website=[[Forbes]]}}</ref> The GSEs dispute these studies and dismissed Greenspan's testimony.

Nine of the ten members of the [[Financial Crisis Inquiry Commission]] reported in 2011 that Fannie and Freddie "contributed to the crisis, but were not a primary cause",{{sfn|FCIC|2011|p=xxvi}} or that since "credit spreads declined not just for housing, but also for other asset classes like commercial real estate ... problems with U.S. housing policy or markets [could] not by themselves explain the U.S. housing bubble."<ref name=GOP>{{cite web |last=Hennessey |first=Keith |author-link=Keith Hennessey|title=FCIR Dissenting Statement of KEITH HENNESSEY, DOUGLAS HOLTZ-EAKIN, BILL THOMAS, CAUSES OF THE FINANCIAL AND ECONOMIC CRISIS |url=http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_hennessey_holtz-eakin_thomas_dissent.pdf |publisher=GPO |year=2010 |quote=Credit spreads declined not just for housing, but also for other asset classes like commercial real estate. This tells us to look to the credit bubble as an essential cause of the U.S. housing bubble. It also tells us that problems with U.S. housing policy or markets do not by themselves explain the U.S. housing bubble.}}</ref> According to the Commission, GSE mortgage securities essentially maintained their value throughout the crisis and did not contribute to the significant financial firm losses that were central to the financial crisis. The GSEs participated in the expansion of subprime and other risky mortgages, but they followed rather than led Wall Street and other lenders into subprime lending.{{sfn|FCIC|2011}}

Several studies by the [[Government Accountability Office]] (GAO), Harvard Joint Center for Housing Studies, the [[Federal Housing Finance Agency]], and several academic institutions summarized by economist Mike Konczal of the [[Roosevelt Institute]], indicate Fannie and Freddie were not to blame for the crisis.<ref>{{cite web |url=http://www.ritholtz.com/blog/2011/11/hey-bloomberg-the-data-shows-gses-did-not-cause-financial-meltdown/ |title=Hey Mayor Bloomberg! No, the GSEs Did Not Cause the Financial Meltdown (but thats just according to the data) – The Big Picture |date=November 5, 2011 |access-date=October 5, 2017}}</ref> A 2011 statistical comparisons of regions of the US which were subject to GSE regulations with regions that were not, done by the [[Federal Reserve]], found that GSEs played no significant role in the subprime crisis.<ref>{{cite web |url=http://www.federalreserve.gov/pubs/feds/2011/201136/201136abs.html |title=FRB: FEDS Abstract 2011–36 |publisher=Federalreserve.gov |date=August 24, 2011 |access-date=November 18, 2012}}</ref> In 2008, David Goldstein and Kevin G. Hall reported that more than 84% of the subprime mortgages came from private lending institutions in 2006, and the share of subprime loans insured by Fannie Mae and Freddie Mac decreased as the bubble got bigger (from a high of insuring 48% to insuring 24% of all subprime loans in 2006).<ref name="Mcclatchy">"[http://www.mcclatchydc.com/2008/10/12/53802/private-sector-loans-not-fannie.html#ixzz12xTyWY91A Private sector loans, not Fannie or Freddie, triggered crisis]"| McClatchy Newspapers| 2008/10/12</ref> In 2008, another source found estimates by some analysts that Fannie's share of the subprime mortgage-backed securities market dropped from a peak of 44% in 2003 to 22% in 2005, before rising to 33% in 2007.<ref name=Duhigg>{{cite news |last=Duhigg |first=Charles |url=https://www.nytimes.com/2008/10/05/business/05fannie.html |title=The Reckoning – Pressured to Take More Risk, Fannie Reached Tipping Point – Series |newspaper=NYTimes.com |date=October 4, 2008 |access-date=November 20, 2012}}</ref>

Whether GSEs played a small role in the crisis because they were legally barred from engaging in subprime lending is disputed.<ref name="NYT-Fanny, Freddie and You">{{cite news |last=Krugman |first=Paul |url=https://www.nytimes.com/2008/07/14/opinion/14krugman.html?_r=2&oref=slogin&oref=slogin |title=Op-Ed Columnist – Fannie, Freddie and You |newspaper=NYTimes.com |date=July 14, 2008 |access-date=November 20, 2012}}</ref> Economist [[Russell Roberts]]<ref>{{cite web |first=Russ |last=Roberts |url=http://www.cafehayek.com/hayek/2008/09/krugman-gets-th.html |title=Krugman gets the facts wrong |publisher=Cafehayek.com |year=2008 |access-date=November 18, 2012}}</ref> cites a June 2008 ''[[Washington Post]]'' article which stated that "[f]rom 2004 to 2006, the two [GSEs] purchased $434 billion in securities backed by subprime loans, creating a market for more such lending."<ref>{{cite news |url=https://www.washingtonpost.com/wp-dyn/content/article/2008/06/09/AR2008060902626.html |newspaper=The Washington Post |title=How HUD Mortgage Policy Fed The Crisis |first=Carol D. |last=Leonnig |date=June 10, 2008 |access-date=May 4, 2010}}</ref> Furthermore, a 2004 HUD report admitted that while trading securities that were backed by subprime mortgages was something that the GSEs officially disavowed, they nevertheless participated in the market.<ref>[http://www.huduser.org/publications/pdf/treasrpt.pdf] pp. 46, 108–10</ref>

Insofar as Fannie and Freddie did purchase substandard loans, some analysts question whether government mandates for affordable housing were the motivation. In December 2011 the [[Securities and Exchange Commission]] charged the former Fannie Mae and Freddie Mac executives, accusing them of misleading investors about risks of subprime-mortgage loans and about the amount of subprime mortgage loans they held in portfolio.<ref>{{cite news |url=https://www.wsj.com/articles/SB10001424052970203733304577102310955780788 |work=The Wall Street Journal |title=SEC Sues Former Fannie, Freddie Executives |date=December 16, 2011 |first1=Nick |last1=Timiraos |first2=Chad |last2=Bray}}</ref> According to financial analyst [[Karen Shaw Petrou|Karen Petrou]], "The SEC's facts paint a picture in which it wasn't high-minded government mandates that did the GSEs wrong, but rather the monomaniacal focus of top management on marketshare. With marketshare came bonuses and with bonuses came risk-taking, understood or not."<ref>{{cite web |last=Petrou |first=Karen |title=Karen Petrou on How Freddie Mac Forgot About $244 Billion |publisher=Federal Financial Analytics |date=December 16, 2011 |url=http://www.fedfin.com/index.php?option=com_content&task=view&id=797&Itemid=30 |access-date=January 14, 2012 |archive-url=https://web.archive.org/web/20120112012828/http://www.fedfin.com/index.php?option=com_content&task=view&id=797&Itemid=30 |archive-date=January 12, 2012 }}</ref> However, there is evidence suggesting that governmental housing policies were a motivational factor. Daniel H. Mudd, the former CEO of Fannie Mae, stated: "We were afraid that lenders would be selling products we weren't buying and Congress would feel like we weren't fulfilling our mission." Another senior Fannie Mae executive stated: "Everybody understood that we were now buying loans that we would have previously rejected, and that the models were telling us that we were charging way too little, but our mandate was to stay relevant and to serve low-income borrowers. So that's what we did."<ref name=autogenerated2>{{cite news |last=Duhigg |first=Charles |url=https://www.nytimes.com/2008/10/05/business/05fannie.html |title=The Reckoning – Pressured to Take More Risk, Fannie Reached Tipping Point – Series |newspaper=NYTimes.com |date=October 4, 2008 |access-date=December 2, 2013}}</ref>

In his lone dissent to the majority and minority opinions of the FCIC, [[Peter J. Wallison]] of the [[American Enterprise Institute]] (AEI) blamed U.S. housing policy, including the actions of Fannie and Freddie, primarily for the crisis, writing: "When the bubble began to deflate in mid-2007, the low quality and high risk loans engendered by government policies failed in unprecedented numbers. The effect of these defaults was exacerbated by the fact that few if any investors – including housing market analysts – understood at the time that Fannie Mae and Freddie Mac had been acquiring large numbers of subprime and other high risk loans in order to meet HUD's affordable housing goals." His dissent relied heavily on the research of fellow AEI member Edward Pinto, the former Chief Credit Officer of Fannie Mae. Pinto estimated that by early 2008 there were 27 million higher-risk, "non-traditional" mortgages (defined as subprime and Alt-A) outstanding valued at $4.6 (~${{Format price|{{Inflation|index=US-GDP|value=4600000000000|start_year=2008}}}} in {{Inflation/year|US-GDP}}) trillion. Of these, Fannie & Freddie held or guaranteed 12 million mortgages valued at $1.8 trillion. Government entities held or guaranteed 19.2 million or $2.7 trillion of such mortgages total.<ref>{{cite web |url=http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_wallison_dissent.pdf |title=FCIC-Final Report Dissent of Wallison-January 2011 |access-date=October 5, 2017}}</ref>

One counter-argument to Wallison and Pinto's analysis is that the credit bubble was global and also affected the U.S. commercial real estate market, a scope beyond U.S. government housing policy pressures. The three Republican authors of the dissenting report to the FCIC majority opinion wrote in January 2011: "Credit spreads declined not just for housing, but also for other asset classes like commercial real estate. This tells us to look to the credit bubble as an essential cause of the U.S. housing bubble. It also tells us that problems with U.S. housing policy or markets do not by themselves explain the U.S. housing bubble."{{sfn|FCIC|2011|p=415}} Economist Paul Krugman wrote in January 2010 that Fannie Mae, Freddie Mac, CRA, or predatory lending were not primary causes of the bubble/bust in residential real estate because there was a bubble of similar magnitude in commercial real estate in America.<ref>{{cite news |url=https://krugman.blogs.nytimes.com/2010/01/07/cre-ative-destruction/ |title=CRE-ative destruction |publisher=Krugman.blogs.nytimes.com |date=January 7, 2010 |access-date=November 20, 2012}}</ref>

Countering the analysis of Krugman and members of the FCIC, Peter Wallison argues that the crisis was caused by the bursting of a real estate bubble that was ''supported largely by low or no-down-payment loans'', which was uniquely the case for U.S. ''residential'' housing loans. He states: "It is not true that every bubble – even a large bubble – has the potential to cause a financial crisis when it deflates." As an example, Wallison notes that other developed countries had "large bubbles during the 1997–2007 period" but "the losses associated with mortgage delinquencies and defaults when these bubbles deflated were far lower than the losses suffered in the United States when the 1997–2007 [bubble] deflated."<ref name="aei.org">Peter J. Wallison, "Dissent from the Majority Report of the Financial Crisis Inquiry Commission," (Washington, DC: American Enterprise Institute, January 2011), p. 18, www.aei.org.</ref>

Other analysis calls into question the validity of comparing the residential loan crisis to the commercial loan crisis. After researching the default of commercial loans during the financial crisis, Xudong An and Anthony B. Sanders reported (in December 2010): "We find limited evidence that substantial deterioration in CMBS [commercial mortgage-backed securities] loan underwriting occurred prior to the crisis."<ref>Sanders, Anthony B. and An, Xudong, Default of CMBS Loans During the Crisis (November 29, 2010). 46th Annual AREUEA Conference Paper. Available at SSRN: https://ssrn.com/abstract=1717062</ref> Other analysts support the contention that the crisis in commercial real estate and related lending took place ''after'' the crisis in residential real estate. Business journalist Kimberly Amadeo wrote "The first signs of decline in residential real estate occurred in 2006. Three years later, commercial real estate started feeling the effects."<ref>Amadeo, Kimberly, "Commercial Real Estate Lending" in News & Issues – US Economy (About.com, November 2013), http://useconomy.about.com/od/grossdomesticproduct/tp/Commercial-Real-Estate-Loan-Defaults.htm {{Webarchive|url=https://web.archive.org/web/20140413143909/http://useconomy.about.com/od/grossdomesticproduct/tp/Commercial-Real-Estate-Loan-Defaults.htm |date=2014-04-13 }}</ref> Denice A. Gierach, a real estate attorney and CPA, wrote:<blockquote>...most of the commercial real estate loans were good loans destroyed by a really bad economy. In other words, the borrowers did not cause the loans to go bad, it was the economy.<ref>Gierach, Denice A., "Waiting for the other shoe to drop in commercial real estate", (Chicago, IL, The Business Ledger, March 4, 2010)</ref></blockquote>

A second counter-argument to Wallison's dissent is that the definition of "non-traditional mortgages" used in Pinto's analysis overstated the number of risky mortgages in the system by including Alt-A, which was not necessarily high-risk. Krugman explained in July 2011 that the data provided by Pinto significantly overstated the number of subprime loans, citing the work of economist Mike Konczal: "As Konczal says, all of this stuff relies on a form of [[three-card monte]]: you talk about 'subprime and other high-risk' loans, lumping subprime with other loans that are not, it turns out, anywhere near as risky as actual subprime; then use this essentially fake aggregate to make it seem as if Fannie/Freddie were actually at the core of the problem."<ref>{{cite web |url=https://krugman.blogs.nytimes.com/2011/07/15/evil-stupid/ |title=Evil > Stupid |access-date=October 5, 2017|date=July 15, 2011 }}</ref>

===Other contributing factors===
====Policies of central banks====
[[File:Fed Funds Rate & Mortgage Rates 2001 to 2008.png|thumb|upright=1.6|[[Federal funds rate]] and various [[mortgage rates]]]]
[[Central bank]]s manage monetary policy and may target the rate of inflation. They have some authority over [[commercial bank]]s and possibly other financial institutions. They are less concerned with avoiding asset [[price bubble]]s, such as the [[housing bubble]] and [[dot-com bubble]]. Central banks have generally chosen to react after such bubbles burst so as to minimize collateral damage to the economy, rather than trying to prevent or stop the bubble itself. This is because identifying an asset bubble and determining the proper monetary policy to deflate it are matters of debate among economists.<ref name="WallStreetJournal">{{cite web |title=The Wall Street Journal Online – Featured Article |url=http://opinionjournal.com/editorial/feature.html?id=110010981 |access-date=May 19, 2008 |year=2008}}</ref><ref>{{cite news |title=Assets and their liabilities |publisher=Economist.com |url=https://www.economist.com/specialreports/displaystory.cfm?story_id=9972549 |access-date=May 19, 2008 |date=October 18, 2007}}</ref>

Some market observers have been concerned that [[Federal Reserve]] actions could give rise to [[moral hazard]].<ref name="brown1"/> A [[Government Accountability Office]] critic said that the [[Federal Reserve Bank of New York]]'s rescue of [[Long-Term Capital Management]] in 1998 would encourage large financial institutions to believe that the Federal Reserve would intervene on their behalf if risky loans went sour because they were "[[too big to fail]]."<ref>{{cite web |url=http://www.gao.gov/archive/2000/gg00067r.pdf |title=Responses to Questions Concerning Long-Term Capital Management and Related Events |access-date=July 13, 2008 |first=Thomas J. |last=McCool |date=February 23, 2000 |work=General Government Division |publisher=[[Government Accountability Office]] |archive-date=April 19, 2012 |archive-url=https://web.archive.org/web/20120419060858/http://www.gao.gov/archive/2000/gg00067r.pdf }}</ref>

A contributing factor to the rise in house prices was the Federal Reserve's lowering of interest rates early in the decade. From 2000 to 2003, the Federal Reserve lowered the [[federal funds rate]] target from 6.5% to 1.0%.<ref>{{cite web |title=Federal Reserve Board: Monetary Policy and Open Market Operations |url=http://www.federalreserve.gov/fomc/fundsrate.htm |access-date=May 19, 2008 |archive-url=https://web.archive.org/web/20010413160651/http://www.federalreserve.gov/fomc/fundsrate.htm |archive-date=April 13, 2001 }}</ref> This was done to soften the effects of the collapse of the [[dot-com bubble]] and of the [[September 11 attacks|September 2001 terrorist attacks]], and to combat the perceived risk of [[deflation]].<ref name="WallStreetJournal" />

The Fed believed that interest rates could be lowered safely primarily because the rate of inflation was low; it disregarded other important factors. According to Richard W. Fisher, President and CEO of the [[Federal Reserve Bank of Dallas]], the Fed's interest rate policy during the early 2000s (decade) was misguided, because measured inflation in those years was below true inflation, which led to a monetary policy that contributed to the housing bubble.<ref>{{cite web |first=Richard W. |last=Fisher |title=Confessions of a Data Dependent: Remarks before the New York Association for Business Economics |date=November 2, 2006 |url=http://dallasfed.org/news/speeches/fisher/2006/fs061102.cfm |access-date=July 13, 2008}}</ref>

[[Ben Bernanke]] and Alan Greenspan — both former chairmen of the Federal Reserve — disagree, arguing decisions on purchasing a home depends on long-term interest rates on mortgages not the short-term rates controlled by the Fed. According to Greenspan, "between 1971 and 2002, the fed funds rate and the mortgage rate moved in lock-step," but when the Fed started to raise rates in 2004,<ref>{{cite web |url=http://www.federalreserve.gov/releases/h15/data.htm |title=FRB: H.15 Release-Selected Interest Rates-Historical Data |publisher=Federalreserve.gov |year=2004 |access-date=November 20, 2012}}</ref><ref>{{cite news |last=Max |first=Sarah |url=https://money.cnn.com/2004/07/13/real_estate/buying_selling/risingrates/ |title=What do rising rates mean for housing |publisher=Money.cnn.com |date=July 27, 2004 |access-date=November 20, 2012}}</ref><ref>{{cite magazine |url=http://www.businessweek.com/magazine/content/04_29/b3892064_mz011.htm |title=Is A Housing Bubble About To Burst? |magazine=Businessweek |date=July 18, 2004 |access-date=November 20, 2012 |archive-url=https://web.archive.org/web/20080304164956/http://www.businessweek.com/magazine/content/04_29/b3892064_mz011.htm |archive-date=March 4, 2008 }}</ref> mortgage rates diverged, continuing to fall (or at least not rise) for another year (see "Fed Funds Rate & Mortgage Rates" graph). Construction of new homes did not peak until January 2006.{{sfn|FCIC|2011|p=103}} Bernanke speculates that a world wide "saving glut" pushed capital or savings into the United States, keeping long-term interest rates low and independent of Central Bank action.<ref name=Bernanke>{{cite web |url=http://www.federalreserve.gov/newsevents/speech/bernanke20070911a.htm |title=Chairman Ben S. Bernanke, At the Bundesbank Lecture, Berlin, Germany: Global Imbalances: Recent Developments and Prospects |publisher=Federalreserve.gov |date=September 11, 2007 |access-date=May 3, 2009}}</ref>

Agreeing with Fisher that the low interest rate policy of the Greenspan Fed both allowed and motivated investors to seek out risk investments offering higher returns, is finance economist [[Raghuram Rajan]] who argues that the underlying causes of the American economy's tendency to go "from bubble to bubble" fueled by unsustainable monetary stimulation, are the "weak safety nets" for the unemployed, which made "the US political system ... acutely sensitive to job growth";<ref name=KOEHN>{{cite news |last=Koehn |first=Nancy F. |title=A Call to Fix the Fundamentals [Review of ''Fault Lines: How Hidden Fractures Still Threaten the World Economy'' by Raghuram G. Rajan] |url=https://www.nytimes.com/2010/08/01/business/01shelf.html?_r=0 |access-date=November 20, 2013 |newspaper=New York Times |date=July 31, 2010}}</ref> and attempts to compensate for the stagnant income of the middle and lower classes with easy credit to boost their consumption.<ref name=Campbell>{{cite web |last=Campbell |first=Doug |title=Book Review of Fault Lines: How Hidden Fractures Still Threaten the World Economy by Raghuram G. Rajan |url=http://www.clevelandfed.org/forefront/2011/spring/ff_2011_spring_03.cfm |work=Spring 2011 |publisher=Reserve Bank of CLeveland |access-date=November 20, 2013 |archive-url=https://web.archive.org/web/20131224120113/http://www.clevelandfed.org/forefront/2011/spring/ff_2011_spring_03.cfm |archive-date=December 24, 2013 }}</ref>

Economist [[Thomas Sowell]] wrote that the Fed's decision to steadily raise interest rates was a key factor that ended the housing bubble. The Fed raised rates from the unusually low level of 1% in 2004 to a more typical 5.25% in 2006. By driving mortgage rates higher, the Fed "made monthly mortgage payments more expensive and therefore reduced the demand for housing." He referred to the Fed action as the "nudge" that collapsed the "house of cards" created by lax lending standards, affordable housing policies, and the preceding period of low interest rates.<ref name="Sowell 2009"/>

====Mark-to-market accounting rule====
{{main|Fair value accounting and the subprime mortgage crisis}}
Former [[Federal Deposit Insurance Corporation]] Chair William Isaac placed much of the blame for the subprime mortgage crisis on the [[Securities and Exchange Commission]] and its fair-value accounting rules, especially the requirement for banks to mark their assets to market, particularly mortgage-backed securities.<ref>[https://www.cnbc.com/2008/10/09/former-fdic-chair-blames-sec-for-credit-crunch.html "Former FDIC Chair Blames SEC for Credit Crunch"], CNBC, October 9, 2008. Retrieved January 25, 2010</ref> Whether or not this is true has been the subject of ongoing debate.<ref>[https://money.cnn.com/2008/11/21/news/fair.value.compromise.fortune/index.htm?postversion=2008112109http://money.cnn.com/2008/11/21/news/fair.value.com Fair value: the pragmatic solution], ''Fortune'', November 21, 2008. Retrieved January 25, 2010</ref><ref>Forbes, Steve. "[https://www.wsj.com/articles/SB123630304198047321 Obama Repeats Bush's Worst Market Mistakes]" The Wall Street Journal. March 6, 2009. Retrieved June 13, 2009</ref>

The debate arises because this accounting rule requires companies to adjust the value of marketable securities (such as the [[mortgage-backed securities]] (MBS) at the center of the crisis) to their market value. The intent of the standard is to help investors understand the value of these assets at a point in time, rather than just their historical purchase price. Because the market for these assets is distressed, it is difficult to sell many MBS at other than prices which may (or may not) be reflective of market stresses, which may be below the value that the mortgage cash flow related to the MBS would merit. As initially interpreted by companies and their auditors, the typically lower sale value was used as the market value rather than the cash flow value. Many large financial institutions recognized significant losses during 2007 and 2008 as a result of marking-down MBS asset prices to market value.<ref>[[Paul J. J. Welfens|Welfens, P. J. J.]], ''Innovations in Macroeconomics'' ([[Berlin]]/[[Heidelberg]]: [[Springer Science+Business Media|Springer]], 2006), [https://books.google.com/books?id=IIA1DY5DlTgC&pg=PA448 p. 448].</ref>

====Globalization, technology and the trade deficit====
[[File:U.S. Trade Deficit 2011.png|thumb|upright=1.6|U.S. [[Current account (balance of payments)|current account]] or [[trade deficit]] through 2012]]
In 2005, [[Ben Bernanke]] addressed the implications of the United States's high and rising [[Current account (balance of payments)|current account]] deficit, resulting from U.S. investment exceeding its savings, or imports exceeding exports.<ref>{{cite web |url=http://www.federalreserve.gov/boarddocs/speeches/2005/20050414/default.htm |title=Bernanke-The Global Saving Glut and U.S. Current Account Deficit |publisher=Federalreserve.gov |date=April 14, 2005 |access-date=February 27, 2009}}</ref> Between 1996 and 2004, the U.S. current account deficit increased by $650 billion, from 1.5% to 5.8% of GDP. The U.S. attracted a great deal of foreign investment, mainly from the emerging economies in Asia and oil-exporting nations. The [[balance of payments]] [[Identity (mathematics)|identity]] requires that a country (such as the U.S.) running a [[Current account (balance of payments)|current account]] deficit also have a [[capital account]] (investment) surplus of the same amount. Foreign investors had these funds to lend, either because they had very high personal savings rates (as high as 40% in China), or because of high oil prices.

Bernanke referred to this as a "[[saving glut]]"<ref name="Bernanke"/> that may have ''pushed'' capital into the United States, a view differing from that of some other economists, who view such capital as having been ''pulled'' into the U.S. by its high consumption levels. In other words, a nation cannot consume more than its income unless it sells assets to foreigners, or foreigners are willing to lend to it. Alternatively, if a nation wishes to increase domestic investment in plant and equipment, it will also increase its level of imports to maintain balance if it has a floating exchange rate.

Regardless of the push or pull view, a "flood" of funds ([[Financial capital|capital]] or [[liquidity]]) reached the U.S. financial market. Foreign governments supplied funds by purchasing [[U.S. Treasury bonds]] and thus avoided much of the direct impact of the crisis. American households, on the other hand, used funds borrowed from foreigners to finance consumption or to bid up the prices of housing and financial assets. Financial institutions invested foreign funds in mortgage-backed securities. American housing and financial assets dramatically declined in value after the housing bubble burst.<ref>{{cite news |url=https://www.economist.com/opinion/displaystory.cfm?story_id=12972083 |title=Economist-When a Flow Becomes a Flood |publisher=Economist.com |date=January 22, 2009 |access-date=February 27, 2009}}</ref><ref>{{cite journal |first=Roger C. |last=Altman |url=http://www.foreignaffairs.org/20090101faessay88101/roger-c-altman/the-great-crash-2008.html |title=Altman-Foreign Affairs-The Great Crash of 2008 |journal=Foreign Affairs |publisher=Foreignaffairs.org |date=January 1, 2009 |issue=January/February 2009 |access-date=February 27, 2009 |archive-url=https://web.archive.org/web/20090223132656/http://www.foreignaffairs.org/20090101faessay88101/roger-c-altman/the-great-crash-2008.html |archive-date=February 23, 2009 }}</ref>

Economist [[Joseph Stiglitz]] wrote in October 2011 that the recession and high unemployment of the 2009–2011 period was years in the making and driven by: unsustainable consumption; high manufacturing productivity outpacing demand thereby increasing unemployment; income inequality that shifted income from those who tended to spend it (i.e., the middle class) to those who do not (i.e., the wealthy); and emerging market's buildup of reserves (to the tune of $7.6 trillion by 2011) which was not spent. These factors all led to a "massive" shortfall in aggregate demand, which was "papered over" by demand related to the housing bubble until it burst.<ref>{{cite web |url=http://www.project-syndicate.org/commentary/stiglitz143/English |title=To Cure the Economy by Joseph E. Stiglitz – Project Syndicate |first=Joseph E. |last=Stiglitz |date=October 3, 2011 |access-date=October 5, 2017}}</ref>

==Subprime mortgage crisis phases==
===January 2007 to March 2008===
{{Further|List of writedowns due to subprime crisis}}
[[File:Securitization Market Activity.png|thumb|upright=1.6|Securitization markets were impaired during the crisis.]]
Financial market stresses became apparent during 2007 that resulted in sizable losses across the financial system, the bankruptcy of over 100 mortgage lenders and the emergency sale of investment bank [[Bear Stearns]] in March 2008 to depository bank [[JP Morgan Chase]]. Some writers began referring to the events in the financial markets during this period the "Subprime Mortgage Crisis" or the "Mortgage crisis".<ref name=BlackburnSMC1 /><ref name="NYTBear1">{{cite news |title=Bear Stearns Reports First Ever Quarterly Loss |url=https://dealbook.nytimes.com/2007/12/20/bear-reports-steep-but-expected-4th-quarter-loss/?_r=0 |date=December 20, 2007 |publisher=NYT}}</ref>

As U.S. housing prices began to fall from their 2006 peak, global investors became less willing to invest in [[mortgage-backed securities]] (MBS). The crisis began to affect the financial sector in February 2007, when [[HSBC]], one of the world's largest banks, said its charge for bad debts would be $10.5 billion (~${{Format price|{{Inflation|index=US-GDP|value=10500000000|start_year=2007}}}} in {{Inflation/year|US-GDP}}), 20% higher than expectations. The increase was driven by increased expected losses in its US mortgage portfolio; this was the first major subprime related loss to be reported.<ref>{{cite news |url=http://news.bbc.co.uk/2/hi/business/7096845.stm |title=Timeline: Sub-prime losses |publisher=News.bbc.co.uk |date=May 19, 2008 |newspaper=BBC |access-date=October 26, 2008}}</ref><ref>{{Cite news|agency=Reuters|date=February 8, 2007|title=HSBC Reports Rise in Troubled Loans|language=en-US|newspaper=The New York Times|url=https://www.nytimes.com/2007/02/08/business/worldbusiness/08bank.html|access-date=August 20, 2021|issn=0362-4331}}</ref> By April 2007, over 50 mortgage companies had declared bankruptcy, many of which had specialized in subprime mortgages, the largest of which was [[New Century Financial]].<ref name="WaPoNewCentury">{{cite news |title=Huge Mortgage Lender Files for Bankruptcy |last=Cho |first=David |url=https://www.washingtonpost.com/wp-dyn/content/article/2007/04/02/AR2007040200591.html |date=April 3, 2007 |newspaper=Washington Post}}</ref> At least 100 [[Mortgage law|mortgage]] companies either shut down, suspended operations or were sold during 2007.<ref name="bloomberg1">{{cite news |title=Wall St. Firms Cut 34,000 Jobs |last=Onaran |first=Yalman |url=https://www.bloomberg.com/apps/news?pid=20601087&sid=aTARUhP3w5xE&refer |date=March 24, 2008 |publisher=Bloomberg}}</ref> These mortgage companies made money on the origination and sale of mortgages, rather than interest from holding the mortgage. They had relied on continuing access to this global pool of investor capital to continue their operations; when investor capital dried-up, they were forced into bankruptcy.

Other parts of the [[shadow banking system]] also encountered difficulty. Legal entities known as [[structured investment vehicle]]s (SIV) and [[hedge fund]]s had borrowed from investors and bought MBS's. When mortgage defaults rose along with the fall in housing prices, the value of the MBS declined. Investors demanded that these entities put up additional collateral or be forced to pay back the investors immediately, a form of [[margin call]]. This resulted in further sales of MBS, which lowered MBS prices further. This dynamic of margin call and price reductions contributed to the collapse of two Bear Stearns hedge funds in July 2007, an event which economist [[Mark Zandi]] referred to as "arguably the proximate catalyst" of the crisis in financial markets.<ref name="Zandi 2010"/> On August 9, 2007, French bank [[BNP Paribas]] announced that it was halting redemptions on three investment funds due to subprime problems, another "beginning point" of the crisis to some observers.<ref>{{cite web |url=https://krugman.blogs.nytimes.com/2014/02/18/eco-348-the-great-recession-class-6/?_php=true&_type=blogs&module=BlogPost-Title&version=Blog+Main&contentCollection=Opinion&action=Click&pgtype=Blogs&region=Body&_r=0 |title=ECO 348, The Great Recession: Class 6 |access-date=October 5, 2017|date=February 18, 2014 }}</ref><ref>{{cite news |url=https://www.nytimes.com/2007/08/09/business/worldbusiness/09iht-09bnp.7054054.html |title=BNP Paribas suspends funds because of subprime problems |date=August 9, 2007 |access-date=October 5, 2017 |newspaper=The New York Times }}</ref>

Investment banks such as Bear Stearns had legal obligations to provide financial support to these entities, which created a cash drain. Bear Stearns reported the first quarterly loss in its history during November 2007 and obtained additional financing from a Chinese [[sovereign wealth fund]]. Investment banks Merrill Lynch and Morgan Stanley had also obtained additional capital from sovereign wealth funds in Asia and the Middle East during late 2007.<ref name="NYTBear1"/>

The major investment banks had also increased their own borrowing and investing as the bubble expanded, taking on additional risk in the search for profit. For example, as of November 30, 2006, Bear Stearns reported $383.6 billion in liabilities and $11.8 billion in equity, a leverage ratio of approximately 33.<ref>{{cite web |url=https://www.sec.gov/Archives/edgar/data/777001/000091412108000077/be11750956-ex13.txt |title=SEC-Bear Stearns-Annual Report for Fiscal 2007-SEC Filing Form 10K |access-date=October 5, 2017}}</ref> This high leverage ratio meant that only a 3% reduction in the value of its assets would render it insolvent.  Unable to withstand the combination of high leverage, reduced access to capital, loss in the value of its MBS securities portfolio, and claims from its hedge funds, Bear Stearns collapsed during March 2008. Historian [[Robin Blackburn]] wrote: "The Wall Street investment banks and brokerages hemorrhaged $175 billion of capital in the period July 2007 to March 2008, and Bear Stearns, the fifth largest, was 'rescued' in March, at a fire-sale price, by JP Morgan Chase with the help of $29 billion of guarantees from the Federal Reserve."<ref name="BlackburnSMC1"/>

===April to December 2008===
{{Further|Indirect economic effects of the subprime mortgage crisis}}[[File:TED Spread graph (2006–2010).svg|thumb|upright=1.6|The [[TED spread]], an indicator of [[credit risk]], increased dramatically during September 2008.]]Financial market conditions continued to worsen during 2008. Simultaneously, the price of oil had been rising steadily since mid-2007 from an already high value (100$) to a peak of 191$ in June 2008, which exacerbated market woes.<ref>{{cite news |url=https://www.macrotrends.net/1369/crude-oil-price-history-chart |title=historical Oil price |publisher=macrotrends.net |date=March 6, 2023 |access-date=March 6, 2023}}</ref> By August 2008, [[financial firms]] around the globe had [[write down|written down]] their holdings of subprime related securities by US$501 billion (~${{Format price|{{Inflation|index=US-GDP|value=501000000000|start_year=2008}}}} in {{Inflation/year|US-GDP}}).<ref>{{cite news |url=https://www.bloomberg.com/apps/news?pid=20601087&sid=a8sW0n1Cs1tY&refer=home |title=Bloomberg.com: Worldwide |publisher=Bloomberg.com |date=August 12, 2008 |access-date=October 26, 2008 |archive-url=https://web.archive.org/web/20121022120400/http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a8sW0n1Cs1tY&refer=home |archive-date=October 22, 2012 }}</ref> The IMF estimated that financial institutions around the globe would eventually have to write off $1.5 trillion of their holdings of subprime MBSs. About $750 billion in such losses had been recognized as of November 2008. These losses wiped out much of the capital of the world banking system. Banks headquartered in nations that have signed the [[Basel Accords]] are required to maintain a ratio of [[Capital requirement|liquid capital]] for every dollar of credit extended to consumers and businesses. Thus the massive reduction in bank capital just described has reduced the credit available to businesses and households.<ref name="foreignaffairs1">{{cite magazine |author=Roger C. Altman |url=http://www.foreignaffairs.org/20090101faessay88101/roger-c-altman/the-great-crash-2008.html |title=Altman – The Great Crash |magazine=Foreign Affairs |access-date=February 27, 2009 |archive-url=https://web.archive.org/web/20090223132656/http://www.foreignaffairs.org/20090101faessay88101/roger-c-altman/the-great-crash-2008.html |archive-date=February 23, 2009 }}</ref>

The crisis hit a critical point in September 2008 with the failure, buyout or bailout of the largest entities in the U.S. [[shadow banking system]]. Investment bank [[Lehman Brothers]] failed, while [[Merrill Lynch]] was purchased by [[Bank of America]]. Investment banks [[Goldman Sachs]] and [[Morgan Stanley]] obtained depository bank holding charters, which gave them access to emergency lines of credit from the Federal Reserve.<ref>{{cite web |url=https://www.cnbc.com/2011/10/12/goldman-morgan-stanley-may-shed-bank-status-analyst.html |title=Goldman, Morgan Stanley May Shed 'Bank' Status: Analyst |first=John |last=Melloy |website=[[CNBC]] |date=October 12, 2011 |access-date=October 5, 2017}}</ref> Government-sponsored enterprises [[Fannie Mae]] and [[Freddie Mac]] were taken over by the federal government. Insurance giant [[AIG]], which had sold insurance-like protection for mortgage-backed securities, did not have the capital to honor its commitments; U.S. taxpayers covered its obligations instead in a bailout that exceeded $100 billion.<ref>{{cite web |url=https://www.pbs.org/wgbh/pages/frontline/meltdown/ |title=PBS Frontline-Inside the Meltdown |publisher=Pbs.org |date=February 17, 2009 |access-date=February 27, 2009}}</ref>

Further, there was the equivalent of a [[bank run]] on other parts of the shadow system, which severely disrupted the ability of non-financial institutions to obtain the funds to run their daily operations. During a one-week period in September 2008, $170 billion (~${{Format price|{{Inflation|index=US-GDP|value=170000000000|start_year=2008}}}} in {{Inflation/year|US-GDP}}) were withdrawn from US [[money fund]]s, causing the Federal Reserve to announce that it would guarantee these funds up to a point.<ref>{{cite news |url=https://www.nytimes.com/2008/09/20/business/20moneys.html |title=Treasury to Guarantee Money Market Funds |first=Diana B. |last=Henriques |date=September 19, 2008 |access-date=October 5, 2017 |newspaper=The New York Times }}</ref> The money market had been a key source of credit for banks ([[Certificate of deposit|CDs]]) and nonfinancial firms ([[commercial paper]]). The [[TED spread]] (see graph above), a measure of the risk of interbank lending, quadrupled shortly after the Lehman failure. This credit freeze brought the global financial system to the brink of collapse.

In a meeting on September 18, 2008, Treasury Secretary [[Henry Paulson]] and Fed Chairman [[Ben Bernanke]] met with key legislators to propose a $700 billion (~${{Format price|{{Inflation|index=US-GDP|value=700000000000|start_year=2008}}}} in {{Inflation/year|US-GDP}}) emergency bailout of the banking system. Bernanke reportedly told them: "If we don't do this, we may not have an economy on Monday."<ref>{{cite news |url=https://www.nytimes.com/2008/10/02/business/02crisis.html |title=As Credit Crisis Spiraled, Alarm Led to Action |first1=Andrew Ross |last1=Sorkin |first2=Diana B. |last2=Henriques |first3=Edmund L. |last3=Andrews |first4=Joe |last4=Nocera |date=October 1, 2008 |access-date=October 5, 2017 |newspaper=The New York Times }}</ref> The [[Emergency Economic Stabilization Act]], also called the [[Troubled Asset Relief Program]] (TARP), was signed into law on October 3, 2008.<ref name = 'Associated Press-Raum-2008-10-03'>Raum, Tom (October 3, 2008) [http://www-cdn.npr.org/templates/story/story.php?storyId=95336601 Bush signs $700 billion bailout bill] {{Webarchive|url=https://web.archive.org/web/20091202085955/http://www-cdn.npr.org/templates/story/story.php?storyId=95336601 |date=December 2, 2009 }}. NPR</ref>

In a nine-day period from October 1–9, the [[S&P 500]] fell a staggering 251 points, losing 21.6% of its value.<ref>{{cite web |title=eCharts |url=https://finance.yahoo.com/echarts |work=Yahoo! Finance |access-date=February 27, 2013 |archive-url=https://web.archive.org/web/20130227075243/http://finance.yahoo.com/echarts |archive-date=February 27, 2013 }}</ref> The week of October 6–10 saw the largest percentage drop in the history of the [[Dow Jones Industrial Average]] – even worse than any single week in the [[Great Depression]].<ref>{{cite web |title=Dow Jones Industrial Average Historical Data |url=http://www.davemanuel.com/dow-jones-historical-data.php |work=Dave Manuel.com |access-date=February 27, 2013 |archive-date=January 29, 2013 |archive-url=https://web.archive.org/web/20130129003405/http://www.davemanuel.com/dow-jones-historical-data.php }}</ref>

The response of the US [[Federal Reserve]], the [[European Central Bank]], and other central banks was dramatic. During the last quarter of 2008, these central banks purchased US$2.5 (~${{Format price|{{Inflation|index=US-GDP|value=2500000000000|start_year=2008}}}} in {{Inflation/year|US-GDP}}) trillion of government debt and troubled private assets from banks. This was the largest liquidity injection into the credit market, and the largest monetary policy action, in world history. The governments of European nations and the US also raised the capital of their national banking systems by $1.5 trillion, by purchasing newly issued [[preferred stock]] in their major banks.<ref name="foreignaffairs1"/> On December 16, 2008, the Federal Reserve cut the [[Federal funds rate]] to 0–0.25%, where it remained until December 2015; this period of [[zero interest-rate policy]] was unprecedented in U.S. history.<ref>[http://www.newyorkfed.org/markets/statistics/dlyrates/fedrate.html Historical Changes of the Target Federal Funds and Discount Rates] {{webarchive |url=https://web.archive.org/web/20081221120546/http://www.newyorkfed.org/markets/statistics/dlyrates/fedrate.html |date=December 21, 2008 }} from the [http://www.newyorkfed.org/ New York Federal Reserve Branch]. Retrieved February 27, 2013.</ref>

==Impacts==
{{Main|2008 financial crisis}}
The International Monetary Fund estimated that large U.S. and European banks lost more than $1 trillion on toxic assets and from bad loans from January 2007 to September 2009. These losses were expected to top $2.8 trillion from 2007 to 2010. U.S. banks losses were forecast to hit $1 trillion and European bank losses will reach $1.6 trillion. The IMF estimated that U.S. banks were about 60 through their losses, but British and eurozone banks only 40%.<ref>{{cite news |url=https://www.reuters.com/article/banks-writedowns-losses-idCNL554155620091105 |title=FACTBOX-U.S., European bank writedowns, credit losses |date=November 5, 2009 |access-date=October 5, 2017 |newspaper=Reuters}}</ref>

===Impact in the U.S.===
[[File:Effects of Crisis on U.S. Household Wealth v1.png|thumb|upright=1.6|Impacts from the crisis on key wealth measures]]
[[File:U.S. GDP Contribution to Change 2007-2009.png|thumb|right|upright=1.6|U.S. Real GDP – Contributions to percent change by component 2007–2009]]

Between June 2007 and November 2008, Americans lost more than a quarter of their net worth. By early November 2008, a broad U.S. stock index, the S&P 500, was down 45% from its 2007 high. Housing prices had dropped 20% from their 2006 peak, with futures markets signaling a 30–35% potential drop. Total home equity in the United States, which was valued at $13 trillion at its peak in 2006, had dropped to $8.8 trillion by mid-2008 and was still falling in late 2008.<ref name="Roger C. Altman">{{cite magazine |author=Roger C. Altman |url=http://www.foreignaffairs.org/20090101faessay88101/roger-c-altman/the-great-crash-2008.html |title=The Great Crash, 2008 – Roger C. Altman |magazine=Foreign Affairs |access-date=February 27, 2009 |archive-url=https://web.archive.org/web/20090223132656/http://www.foreignaffairs.org/20090101faessay88101/roger-c-altman/the-great-crash-2008.html |archive-date=February 23, 2009 }}</ref> Total retirement assets, Americans' second-largest household asset, dropped by 22%, from $10.3 trillion in 2006 to $8 trillion in mid-2008. During the same period, savings and investment assets (apart from retirement savings) lost $1.2 trillion and pension assets lost $1.3 trillion. Taken together, these losses total $8.3 trillion.<ref name="Roger C. Altman"/>

* Real gross domestic product (GDP) began contracting in the third quarter of 2008 and did not return to growth until Q1 2010.<ref>{{cite web |url=http://research.stlouisfed.org/fred2/graph/?id=GDPC1 |title=Real Gross Domestic Product |website=Federal Reserve Bank of St Louis |date=September 28, 2017 |access-date=October 5, 2017}}</ref> 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.<ref>{{cite web |url=http://www.cbo.gov/publication/43907 |title=The Budget and Economic Outlook: Fiscal Years 2013 to 2023 |date=February 5, 2013 |access-date=October 5, 2017}}</ref>
* The unemployment rate rose from 5% in 2008 pre-crisis to 10% by late 2009, then steadily declined to 7.6% by March 2013.<ref>{{cite web |url=http://research.stlouisfed.org/fred2/graph/?id=UNRATE |title=Civilian Unemployment Rate |website=Federal Reserve Bank of St Louis  |date=September 1, 2017 |access-date=October 5, 2017}}</ref> 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.<ref>{{cite web |url=http://research.stlouisfed.org/fred2/graph/?id=UNEMPLOY |title=Unemployment Level |website=Federal Reserve Bank of St Louis |date=September 1, 2017 |access-date=October 5, 2017}}</ref>
* 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.<ref>{{cite web |url=https://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=3&isuri=1&903=5 |title=Bureau of Economic Analysis |first=US Department of Commerce, BEA, Bureau of Economic |last=Analysis |website=www.bea.gov |access-date=October 5, 2017 |archive-date=August 6, 2017 |archive-url=https://web.archive.org/web/20170806184658/https://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=3&isuri=1&903=5 |url-status=dead }}</ref>
* 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.<ref>{{cite web |url=http://research.stlouisfed.org/fred2/series/SPCS20RSA |title=S&P/Case-Shiller 20-City Composite Home Price Index |website=Federal Reserve Bank of St Louis |date=September 26, 2017 |access-date=October 5, 2017}}</ref>
* 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.<ref>{{cite web |url=http://research.stlouisfed.org/fred2/graph/?id=SP500 |title=S&P 500 |website=Federal Reserve Bank of St Louis |date=October 4, 2017 |access-date=October 5, 2017}}</ref>
* 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.<ref>{{cite web |url=http://research.stlouisfed.org/fred2/graph/?id=TNWBSHNO |title=Households and Nonprofit Organizations; Net Worth, Level |website=Federal Reserve Bank of St Louis |date=September 21, 2017 |access-date=October 5, 2017}}</ref>
* U.S. total national debt rose from 66% GDP in 2008 pre-crisis to over 103% by the end of 2012.<ref>[http://research.stlouisfed.org/fred2/graph/?id=GFDEGDQ188S Graph: Federal Debt: Total Public Debt as Percent of Gross Domestic Product (GFDEGDQ188S) – FRED – St. Louis Fed]. Research.stlouisfed.org. Retrieved on August 12, 2013.</ref> [[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.<ref name="blogs.ft.com">Wolf, M., [https://www.ft.com/content/e5ea9f2a-8528-11e8-a29d-73e3d454535d "What really went wrong in the 2008 financial crisis?"], ''[[Financial Times]]'', July 17, 2018.</ref>

Members of US [[Demographics of the United States|minority groups]] received a disproportionate number of subprime mortgages, and so have experienced a disproportionate level of the resulting [[foreclosure]]s.<ref>{{cite news |url=https://www.nytimes.com/2007/10/15/nyregion/15subprime.html?ex=1350187200&en=a9978e04a9864642&ei=5088&partner=rssnyt&emc=rss |title=Study Finds Disparities in Mortgages by Race |newspaper=[[New York Times]] |author=Manny Fernandez |date=October 15, 2007 |access-date=May 19, 2008}}</ref><ref>[https://www.reuters.com/article/domesticNews/idUSN3019759720080130?feedType=RSS&feedName=domesticNews&pageNumber=1&virtualBrandChannel=0&sp=true Immigrants hit hard by slowdown, subprime crisis]. Reuters. January 30, 2008</ref><ref>[https://www.washingtonpost.com/wp-dyn/content/story/2008/06/29/ST2008062902089.html Subprime Mortgages and Race: A Bit of Good News May Be Illusory] Shankar Vedantam, washingtonpost.com, June 30, 2008</ref> A study commissioned by the [[ACLU]] on the long-term consequences of these discriminatory lending practices found that the housing crisis will likely widen the black-white [[wealth gap]] for the next generation.<ref>Sarah Burd-Sharps and Rebecca Rasch. ''[https://www.ssrc.org/publications/view/impact-of-the-us-housing-crisis-on-the-racial-wealth-gap-across-generations/ Impact of the US Housing Crisis on the Racial Wealth Gap Across Generations]''. The [[Social Science Research Council]] and the [[ACLU]]. 2015.</ref> Borrowers with complex mortgages experienced substantially higher default rates than borrowers with traditional mortgages with similar characteristics.<ref>{{Cite web|url=http://www.chicagofed.org/digital_assets/publications/working_papers/2010/wp2010_17.pdf|title=Federal Reserve Bank of Chicago, ''Complex Mortgages'', November 2010}}</ref> The crisis had a devastating effect on the U.S. auto industry. New vehicle sales, which peaked at 17 million in 2005, recovered to only 12 million by 2010.<ref>{{Cite web|url=http://community.nytimes.com/comments/www.nytimes.com/2011/02/23/business/economy/23leonhardt.html|archive-url=https://web.archive.org/web/20110226235935/http://community.nytimes.com/comments/www.nytimes.com/2011/02/23/business/economy/23leonhardt.html|title=NYT-Why Budget Cuts Don't Bring Prosperity-February 2011|archive-date=February 26, 2011}}</ref>

===Impact on Europe===
{{Further|European sovereign-debt crisis|Austerity}}
[[File:Eurozone Countries Public Debt to GDP Ratio 2010 vs. 2011.png|right|thumb|[[Public debt]] to GDP ratio for selected European countries – 2008 to 2012.|upright=1.6]]The crisis in Europe generally progressed from banking system crises to sovereign debt crises, as many countries elected to bail out their banking systems using taxpayer money. Greece was different in that it concealed large public debts in addition to issues within its banking system. Several countries received bailout packages from the "troika" (European Commission, European Central Bank, International Monetary Fund), which also implemented a series of emergency measures.

Many European countries embarked on austerity programs, reducing their budget deficits relative to GDP from 2010 to 2011. For example, according to the ''[[CIA World Factbook]]'' Greece improved its budget deficit from 10.4% GDP in 2010 to 9.6% in 2011. Iceland, Italy, Ireland, Portugal, France, and Spain also improved their budget deficits from 2010 to 2011 relative to GDP.<ref name="cia.gov">{{cite web |url=https://www.cia.gov/the-world-factbook/countries/greece/ |title=The World Factbook — Central Intelligence Agency |website=www.cia.gov |access-date=October 5, 2017}}</ref><ref name="Eurostat1">[http://epp.eurostat.ec.europa.eu/portal/page/portal/euroindicators/peeis Eurostat-Selected Principal European Economic Indicators-Retrieved 15 August 2012] {{webarchive |url=https://web.archive.org/web/20130119182304/http://epp.eurostat.ec.europa.eu/portal/page/portal/euroindicators/peeis |date=January 19, 2013 }}</ref>

However, with the exception of Germany, each of these countries had public-debt-to-GDP ratios that increased (i.e., worsened) from 2010 to 2011, as indicated in the chart shown here. Greece's public-debt-to-GDP ratio increased from 143% in 2010 to 165% in 2011.<ref name="cia.gov"/> This indicates that despite improving budget deficits, GDP growth was not sufficient to support a decline (improvement) in the debt-to-GDP ratio for these countries during this period. [[Eurostat]] reported that the debt to GDP ratio for the 17 Euro area countries together was 70.1% in 2008, 79.9% in 2009, 85.3% in 2010, and 87.2% in 2011.<ref name="Eurostat1"/><ref>{{Cite web|url=http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-23042012-AP/EN/2-23042012-AP-EN.PDF|archive-url=https://web.archive.org/web/20130919121523/http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-23042012-AP/EN/2-23042012-AP-EN.PDF|title=Eurostat News Release-Euro indicators-23 April 2012|archive-date=September 19, 2013}}</ref>

Unemployment is another variable that might be considered in evaluating austerity measures. According to the ''CIA World Factbook'', from 2010 to 2011, the unemployment rates in Spain, Greece, Ireland, Portugal, and the UK increased. France and Italy had no significant changes, while in Germany and Iceland the unemployment rate declined.<ref name="cia.gov"/> Eurostat reported that Eurozone unemployment reached record levels in September 2012 at 11.6%, up from 10.3% the prior year. Unemployment varied significantly by country.<ref>{{cite web |url=https://money.cnn.com/2012/10/31/news/economy/euro-unemployment/index.html?hpt=hp_t3 |title=Eurozone unemployment hits record high |first=Aaron |last=Smith |access-date=October 5, 2017|date=October 31, 2012 }}</ref>[[File:Eurozone-structural1.jpg|thumb|Relationship between fiscal tightening (austerity) in [[Eurozone countries]] with their GDP growth rate, 2008–2012<ref>Martin Wolf (April 27, 2012) [http://blogs.ft.com/martin-wolf-exchange/2012/04/27/the-impact-of-fiscal-austerity-in-the-eurozone/ "The impact of fiscal austerity in the eurozone"] ''Financial Times''</ref>|upright=1.6]]

Economist [[Martin Wolf]] analyzed the relationship between cumulative GDP growth from 2008 to 2012 and total reduction in budget deficits due to austerity policies (see chart) in several European countries during April 2012. He concluded that: "In all, there is no evidence here that large fiscal contractions [budget deficit reductions] bring benefits to confidence and growth that offset the direct effects of the contractions. They bring exactly what one would expect: small contractions bring recessions and big contractions bring depressions." Changes in budget balances (deficits or surpluses) [[Coefficient of determination|explained]] approximately 53% of the change in GDP, according to the equation derived from the IMF data used in his analysis.<ref>{{cite web |url=http://blogs.ft.com/martin-wolf-exchange/2012/04/27/the-impact-of-fiscal-austerity-in-the-eurozone/ |title=Martin Wolf |website=Financial Times |access-date=October 5, 2017}}</ref>

Economist Paul Krugman analyzed the relationship between GDP and reduction in budget deficits for several European countries in April 2012 and concluded that austerity was slowing growth, similar to Martin Wolf. He also wrote: "this also implies that 1 euro of austerity yields only about 0.4 euros of reduced deficit, even in the short run. No wonder, then, that the whole austerity enterprise is spiraling into disaster."<ref>{{cite web |url=https://krugman.blogs.nytimes.com/2012/04/24/austerity-and-growth-again-wonkish/ |title=Austerity And Growth, Again (Wonkish) |access-date=October 5, 2017|date=April 24, 2012 }}</ref>

===Sustained effects===
[[File:U.S. GDP - Real vs. Potential Per CBO Forecasts of 2007 and 2016.png|thumb|right|upright=1.6|This chart compares U.S. potential GDP under two [[Congressional Budget Office|CBO]] forecasts (one from 2007 and one from 2016) versus the actual real GDP. It is based on a similar diagram from economist Larry Summers from 2014.<ref>{{cite web |url=http://larrysummers.com/wp-content/uploads/2014/06/NABE-speech-Lawrence-H.-Summers1.pdf |title=Larry Summers-U.S. Economic Prospects-Keynote Address at the NABE Conference 2014 |access-date=October 5, 2017}}</ref>]]

The crisis had a significant and long-lasting impact on U.S. employment. During the [[Great Recession]], 8.5 million jobs were lost from the peak employment in early 2008 of approximately 138 million to the trough in February 2010 of 129 million, roughly 6% of the workforce. From February 2010 to September 2012, approximately 4.3 million jobs were added, offsetting roughly half the losses.<ref>{{cite web |url=http://research.stlouisfed.org/fred2/series/PAYEMS |title=All Employees: Total Nonfarm Payrolls |website=Federal Reserve Bank of St Louis |date=September 1, 2017 |access-date=October 5, 2017}}</ref><ref>{{cite web |url=http://www.calculatedriskblog.com/2012/10/september-employment-report-114000-jobs.html |title=September Employment Report: 114,000 Jobs, 7.8% Unemployment Rate |website=www.calculatedriskblog.com |access-date=October 5, 2017}}</ref>

In Spring 2011 there were about a million homes in foreclosure in the United States, several million more in the pipeline, and 872,000 previously foreclosed homes in the hands of banks.<ref>Dash, E., [https://www.nytimes.com/2011/05/23/business/economy/23glut.html "As Lenders Hold Homes in Foreclosure, Sales Are Hurt"], ''The New York Times'', May 22, 2011.</ref> Sales were slow; economists estimated that it would take three years to clear the backlogged inventory. According to [[Mark Zandi]] of [[Moody's Analytics]], home prices were falling and could be expected to fall further during 2011. However, the rate of new borrowers falling behind in mortgage payments had begun to decrease.<ref>{{cite news |last=Dash |first=Eric |title=As Lenders Hold Homes in Foreclosure, Sales Are Hurt |url=https://www.nytimes.com/2011/05/23/business/economy/23glut.html |access-date=May 23, 2011 |newspaper=The New York Times |date=May 22, 2011}}</ref>

The ''New York Times'' reported in January 2015 that: "About 17% of all homeowners are still 'upside down' on their mortgages ... That's down from 21% in the third quarter of 2013, and the 2012 peak of 31%." Foreclosures as of October 2014 were down 26% from the prior year, at 41,000 completed foreclosures. That was 65% below the peak in September 2010 (roughly 117,000), but still above the pre-crisis (2000–2006) average of 21,000 per month.<ref>{{cite news |url=https://www.nytimes.com/2015/01/04/realestate/a-decline-in-problem-mortgages.html |title=A Decline in Problem Mortgages |first=Lisa |last=Prevost |date=October 5, 2017 |access-date=October 5, 2017 |newspaper=The New York Times }}</ref>

Research indicates recovery from financial crises can be protracted, with lengthy periods of high unemployment and substandard economic growth.<ref name="bloomberg.com">{{cite news |url=https://www.bloomberg.com/view/articles/2012-10-15/sorry-u-s-recoveries-really-aren-t-different |title=Sorry, U.S. Recoveries Really Aren't Different |date=October 15, 2012 |access-date=October 5, 2017 |via=www.bloomberg.com|newspaper=Bloomberg.com }}</ref> Economist [[Carmen Reinhart]] stated in August 2011: "Debt de-leveraging [reduction] takes about seven years ... And in the decade following severe financial crises, you tend to grow by 1 to 1.5 percentage points less than in the decade before, because the decade before was fueled by a boom in private borrowing, and not all of that growth was real. The unemployment figures in advanced economies after falls are also very dark. Unemployment remains anchored about five percentage points above what it was in the decade before."<ref>{{cite news |last1=Klein |first1=Ezra |title=Don't call it a recession |url=https://www.washingtonpost.com/blogs/ezra-klein/post/dont-call-it-a-recession/2011/07/11/gIQAVWlF2I_blog.html |newspaper=Washington Post |date=August 8, 2011}}</ref>

====Savings surplus or investment deficit====
[[File:U.S. Private Sector Financial Surplus.png|upright=1.6|thumb|right|U.S. savings and investment; savings less investment is the private sector financial surplus]]

During the crisis and ensuing recession, U.S. consumers increased their savings as they paid down debt ("deleveraged") but corporations simultaneously were reducing their investment. In a healthy economy, private sector savings placed into the banking system is borrowed and invested by companies. This investment is one of the major components of GDP. A private sector financial deficit from 2004 to 2008 transitioned to a large surplus of savings over investment that exceeded $1 trillion by early 2009 and remained above $800 billion as of September 2012. Part of this investment reduction related to the housing market, a major component of investment in the GDP computation. This surplus explains how even significant government deficit spending would not increase interest rates and how Federal Reserve action to increase the money supply does not result in inflation, because the economy is awash with savings with no place to go.<ref name="krugman.blogs.nytimes.com">{{cite web |url=https://krugman.blogs.nytimes.com/2011/12/28/the-problem-2/ |title=The Problem |access-date=October 5, 2017|date=December 28, 2011 }}</ref>

Economist [[Richard Koo]] described similar effects for several of the developed world economies in December 2011:<blockquote>Today private sectors in the U.S., the U.K., Spain, and Ireland (but not Greece) are undergoing massive deleveraging in spite of record low interest rates. This means these countries are all in serious balance sheet recessions. The private sectors in Japan and Germany are not borrowing, either. With borrowers disappearing and banks reluctant to lend, it is no wonder that, after nearly three years of record low interest rates and massive liquidity injections, industrial economies are still doing so poorly. Flow of funds data for the U.S. show a massive shift away from borrowing to savings by the private sector since the housing bubble burst in 2007. The shift for the private sector as a whole represents over 9 percent of U.S. GDP at a time of zero interest rates. Moreover, this increase in private sector savings exceeds the increase in government borrowings (5.8 percent of GDP), which suggests that the government is not doing enough to offset private sector deleveraging.<ref>{{cite web |url=http://www.paecon.net/PAEReview/issue58/Koo58.pdf |title=Richard Koo-The world in balance sheet recession-Real World Economics Review-December 2011 |access-date=October 5, 2017}}</ref></blockquote>

====Sectoral financial balances====
{{main|Sectoral financial balances}}
[[File:Sectoral Financial Balances in U.S. Economy.png|thumb|upright=1.6|right|[[Sectoral financial balances]] in US economy 1990–2017. By definition, the three balances must net to zero. Since 2009, the US foreign surplus (trade deficit) and private sector surplus have driven a [[government budget deficit]].]]
Economist [[Wynne Godley]] explained in 2004–2005 how U.S. sector imbalances posed a significant risk to the U.S. and global economy. The combination of a high and growing foreign sector surplus and high government sector deficit meant that the private sector was moving towards a net borrowing position (from surplus to deficit) as a housing bubble developed, which he warned was an unsustainable combination.<ref>{{cite journal |last1=Godley |first1=Wynne |author1-link=Wynne Godley |title=Imbalances Looking for a Policy  |journal=Policy Notes |date=April 2005 |issue=2005/4 |url=https://www.levyinstitute.org/pubs/pn_4_05.pdf |publisher=[[Levy Economics Institute]] |access-date=April 8, 2021}}<!-- note issue date obtained from website "Publications" page --></ref><ref>{{cite journal |last1=Godley |first1=Wynne |author1-link=Wynne Godley |title=Some Unpleasant American Arithmetic |journal=Policy Notes |date=June 2005 |issue=2005/5 |url=https://www.levyinstitute.org/pubs/pn_5_05.pdf |publisher=[[Levy Economics Institute]] |access-date=April 8, 2021}}<!-- note incorrect issue number in title metadata, issue date obtained from website "Publications" page --></ref>

Economist [[Martin Wolf]] explained in July 2012 that government fiscal balance is one of three major financial [[sectoral balances]] in the U.S. economy, the others being the foreign financial sector and the private financial sector. The sum of the surpluses or deficits across these three sectors must be zero by [[Identity (mathematics)|definition]]. In the U.S., a foreign financial surplus (or capital surplus) exists because capital is imported (net) to fund the [[trade deficit]]. Further, there is a private sector financial surplus due to household savings exceeding business investment. By definition, there must therefore exist a government budget deficit so all three net to zero. The government sector includes federal, state and local. For example, the government budget deficit in 2011 was approximately 10% GDP (8.6% GDP of which was federal), offsetting a capital surplus of 4% GDP and a private sector surplus of 6% GDP.<ref name="blogs.ft.com"/>

Wolf argued that the sudden shift in the private sector from deficit to surplus forced the government balance into deficit, writing: "The financial balance of the private sector shifted towards surplus by the almost unbelievable cumulative total of 11.2 per cent of gross domestic product between the third quarter of 2007 and the second quarter of 2009, which was when the financial deficit of US government (federal and state) reached its peak...No fiscal policy changes explain the collapse into massive fiscal deficit between 2007 and 2009, because there was none of any importance. The collapse is explained by the massive shift of the private sector from financial deficit into surplus or, in other words, from boom to bust."<ref name="blogs.ft.com"/>

==Responses==
{{Further|Subprime mortgage crisis solutions debate}}

Various actions have been taken since the crisis became apparent in August 2007. In September 2008, major instability in world financial markets increased awareness and attention to the crisis. Various agencies and regulators, as well as political officials, began to take additional, more comprehensive steps to handle the crisis.

To date, various government agencies have committed or spent trillions of dollars in loans, asset purchases, guarantees, and direct spending. For a summary of U.S. government financial commitments and investments related to the crisis, see [https://money.cnn.com/news/specials/storysupplement/bailout_scorecard/index.html CNN – Bailout Scorecard].

===Federal Reserve Bank===
{{Main|Federal Reserve responses to the subprime crisis}}
[[File:U.S. Federal Reserve - Treasury and Mortgage-Backed Securities Held.png|thumb|upright=1.6|[[Federal Reserve]] holdings of [[United States Treasury security|treasury]] (blue) and mortgage-backed securities (red)]]

The central bank of the US, the [[Federal Reserve]], in partnership with [[central bank]]s around the world, took several steps to address the crisis.<ref name = "NYT-Appelbaum-2014-02-21">{{cite news |first=Binyamin |last=Appelbaum |author-link=Binyamin Appelbaum|title=A Chronicle of Uncertainty, Then Bold Action, in 2008 Fed Transcripts |date=February 21, 2014 |work=The New York Times |url=https://www.nytimes.com/2014/02/22/business/federal-reserve-2008-transcripts.html}}</ref> Federal Reserve Chairman [[Ben Bernanke]] stated in early 2008: "Broadly, the Federal Reserve's response followed two tracks: efforts to support [[market liquidity]] and functioning and the pursuit of our macroeconomic objectives through monetary policy."<ref name="Bernanke20080110a" />

The Federal Reserve Bank:
*Lowered the target for the [[Federal funds rate]] 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;<ref>{{cite web |url=http://www.federalreserve.gov/newsevents/press/monetary/20070918a.htm |title=FRB: Press Release-FOMC Statement-18 September 2007 |publisher=Federalreserve.gov |access-date=October 26, 2008}}</ref><ref>{{cite web |url=http://www.federalreserve.gov/newsevents/press/monetary/20080318a.htm |title=FRB: Press Release-FOMC statement-18 March 2008 |publisher=Federalreserve.gov |access-date=October 26, 2008}}</ref> In December 2008, the Fed further lowered the federal funds rate target to a range of 0–0.25% (25 basis points).<ref>{{cite web |url=http://www.federalreserve.gov/newsevents/speech/bernanke20090113a.htm |title=FRB: Speech—Bernanke, The Crisis and the Policy Response—January 13, 2009 |website=www.federalreserve.gov |access-date=October 5, 2017}}</ref>
*Undertook, along with other central banks, [[open market operations]] 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 window|discount rate]] in the US) they charge member banks for short-term loans;<ref>{{cite web |title=FRB: Speech – Bernanke, The Recent Financial Turmoil and its Economic and Policy Consequences – 15 October 2007 |url=http://federalreserve.gov/newsevents/speech/bernanke20071015a.htm |access-date=May 19, 2008 |year=2008}}</ref>
*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 [[Term Auction Facility]] (TAF) and [[Term Asset-Backed Securities Loan Facility]] (TALF).<ref name="postversion1">{{cite news |author=[[David P. Goldman|Goldman, D. P.]] |url=https://money.cnn.com/2008/11/26/news/economy/where_bailout_stands/index.htm?postversion=2008112813 |title=Bailouts |work=CNNMoney |date=November 26, 2008 |access-date=February 27, 2009}}</ref>
*In November 2008, the Fed announced a $600 billion program to purchase the MBS of the GSE, to help lower mortgage rates.<ref>{{cite web |url=http://www.federalreserve.gov/newsevents/press/monetary/20081125b.htm |title=Fed – GSE (Government Sponsored Enterprise) MBS purchases |publisher=Federalreserve.gov |date=November 25, 2008 |access-date=February 27, 2009}}</ref>
*In March 2009, the [[Federal Open Market Committee]] 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.<ref>{{cite web |url=http://www.federalreserve.gov/newsevents/press/monetary/20090318a.htm |title=FRB: Press Release-FOMC statement-March 18, 2009 |publisher=Federalreserve.gov |date=March 18, 2009 |access-date=November 18, 2012}}</ref>

According to [[Ben Bernanke]], expansion of the Fed balance sheet means the Fed is electronically creating money, necessary "because our economy is very weak and inflation is very low. When the economy begins to recover, that will be the time that we need to unwind those programs, raise interest rates, reduce the money supply, and make sure that we have a recovery that does not involve inflation."<ref>{{cite web |url=https://www.cbsnews.com/news/ben-bernankes-greatest-challenge/ |title=Ben Bernanke's Greatest Challenge |website=[[CBS News]] |date=12 March 2009 |access-date=October 5, 2017}}</ref>

''[[The New York Times]]'' reported in February 2013 that the Fed continued to support the economy with various monetary stimulus measures: "The Fed, which has amassed almost $3 trillion in Treasury and mortgage-backed securities to promote more borrowing and lending, is expanding those holdings by $85 billion a month until it sees clear improvement in the labor market. It plans to hold short-term interest rates near zero even longer, at least until the unemployment rate falls below 6.5 percent."<ref>{{cite news |url=https://www.nytimes.com/2013/02/27/business/economy/fed-chairman-defends-stimulus-efforts.html |title=Fed Chairman Defends Stimulus Efforts |first=Binyamin |last=Appelbaum |date=February 26, 2013 |access-date=October 5, 2017 |newspaper=The New York Times }}</ref>

===Economic stimulus===
{{Main|Economic Stimulus Act of 2008|American Recovery and Reinvestment Act of 2009}}

On February 13, 2008, President [[George W. Bush]] signed into law a $168 billion (~${{Format price|{{Inflation|index=US-GDP|value=168000000000|start_year=2008}}}} in {{Inflation/year|US-GDP}}) economic stimulus package, mainly taking the form of [[income tax]] rebate checks mailed directly to taxpayers.<ref name="Yahoo-mail">{{cite news |author=Jeannine Aversa |title=Rebate Checks in the Mail by Spring |url=https://huffingtonpost.com/2008/02/13/rebate-checks-in-the-mail_n_86525.html |work=[[The Huffington Post]] |publisher=[[Arianna Huffington]] |date=February 13, 2008 |access-date=May 19, 2008}}</ref> Checks were mailed starting the week of April 28, 2008. However, this rebate coincided with an unexpected [[Oil price increases since 2003|jump in gasoline]] and food prices. This coincidence led some to wonder whether the stimulus package would have the intended effect, or whether consumers would simply spend their rebates to cover higher food and fuel prices.

On February 17, 2009, U.S. President [[Barack Obama]] signed the [[American Recovery and Reinvestment Act of 2009]], an $787 billion (~${{Format price|{{Inflation|index=US-GDP|value=787000000000|start_year=2009}}}} in {{Inflation/year|US-GDP}}) stimulus package with a broad spectrum of spending and tax cuts.<ref>{{cite news |url=http://news.bbc.co.uk/1/hi/business/7889897.stm |title=BBC – Stimulus Package 2009 |work=BBC News |date=February 14, 2009 |access-date=February 27, 2009}}</ref> Over $75 billion of the package was specifically allocated to programs which help struggling homeowners. This program is referred to as the Homeowner Affordability and Stability Plan.<ref>{{Cite web|url=http://www.treas.gov/initiatives/eesa/homeowner-affordability-plan/FactSheet.pdf|archive-url=https://web.archive.org/web/20090219152954/http://www.treas.gov//initiatives//eesa//homeowner-affordability-plan//FactSheet.pdf|title=Obama-Homeowner Affordability and Stability Plan|archive-date=February 19, 2009}}</ref>

The U.S. government continued to run large deficits post-crisis, with the national debt rising from $10.0 trillion as of September 2008 to $16.1 trillion by September 2012. The debt increases were $1.89 trillion in fiscal year 2009, $1.65 trillion in 2010, $1.23 trillion in 2011, and $1.26 trillion in 2012.<ref name="auto">{{cite web |url=http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt_histo5.htm |title=Government – Historical Debt Outstanding – Annual2000 – 2015 |website=www.treasurydirect.gov |access-date=October 5, 2017 |archive-date=June 3, 2012 |archive-url=https://web.archive.org/web/20120603222246/http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt_histo5.htm |url-status=dead }}</ref>

===Bank solvency and capital replenishment===
{{Main|Emergency Economic Stabilization Act of 2008}}{{See also|2008 United Kingdom bank rescue package}}
[[File:Bank Common Equity to Assets Ratios 2004 - 2008.png|thumb|upright=1.6|Common equity to total assets ratios for major US banks]]
Losses on mortgage-backed securities and other assets purchased with borrowed money dramatically reduced the capital base of financial institutions, rendering many either insolvent or less capable of lending. Governments provided funds to banks. Some banks took significant steps to acquire additional capital from private sources.

The U.S. government passed the [[Emergency Economic Stabilization Act of 2008]] (EESA or TARP) during October 2008. This law included $700 billion in funding for the "[[Troubled Assets Relief Program]]" (TARP). Following a model initiated by the [[2008 United Kingdom bank rescue package|United Kingdom bank rescue package]],<ref name=Langley2015>{{cite book |last1=Langley |first1=Paul |title=Liquidity Lost: The Governance of the Global Financial Crisis |date=2015 |publisher=Oxford University Press |isbn=978-0-19-968378-9 |pages=83–86 |url=https://books.google.com/books?id=FhGaBQAAQBAJ&pg=PA86}}</ref><ref>{{cite news |title=Gordon Does Good |url=https://www.nytimes.com/2008/10/13/opinion/13krugman.html?_r=0 |access-date=February 5, 2016 |work=The New York Times |date=October 12, 2008}}</ref> $205 billion was used in the [[Capital Purchase Program]] to lend funds to banks in exchange for dividend-paying [[preferred stock]].<ref>{{cite web |url=http://www.ustreas.gov/press/releases/hp1149.htm |title=Treasury – Paulson News Release |archive-url=https://web.archive.org/web/20080924123414/http://www.ustreas.gov/press/releases/hp1149.htm |archive-date=September 24, 2008 }}</ref><ref>{{cite news |url=https://www.nytimes.com/2008/09/21/business/21cong.html?hp |title=Administration Is Seeking $700 Billion for Wall Street |newspaper=New York Times |first=David M. |last=Herszenhorn |date=September 21, 2008 |access-date=May 24, 2010}}</ref>

Another method of recapitalizing banks is for government and private investors to provide cash in exchange for mortgage-related assets (i.e., "toxic" or "legacy" assets), improving the quality of bank capital while reducing uncertainty regarding the financial position of banks. U.S. Treasury Secretary [[Timothy Geithner]] announced a plan during March 2009 to purchase "legacy" or "toxic" assets from banks. The [[Public-Private Partnership Investment Program]] involved government loans and guarantees to encourage private investors to provide funds to purchase toxic assets from banks.<ref>{{Cite web|url=http://www.ustreas.gov/press/releases/tg65.htm|archive-url=https://web.archive.org/web/20090327025130/http://www.ustreas.gov/press/releases/tg65.htm|title=Press Release – Public-Private Investment Program|archive-date=March 27, 2009}}</ref>

As of April 2012, the government had recovered $300 billion of the $414 billion that was ultimately distributed to them via TARP. Some elements of TARP such as foreclosure prevention aid will not be paid back. Estimated taxpayer losses were $60 billion.<ref>{{cite web |url=https://www.huffingtonpost.com/2012/04/25/tarp-profit-a-myth_n_1450363.html |title=TARP Profit A Myth, Claims TARP Inspector General Christy Romero |first=Mark |last=Gongloff |date=April 25, 2012 |access-date=October 5, 2017 |via=Huff Post}}</ref> For a summary of U.S. government financial commitments and investments related to the crisis, see [https://money.cnn.com/news/specials/storysupplement/bailout_scorecard/index.html CNN – Bailout Scorecard]. For a summary of TARP funds provided to U.S. banks as of December 2008, see [https://www.reuters.com/article/marketsNews/idUSN1752684920081216 Reuters-TARP Funds].

===Bailouts and failures of financial firms===
{{Further|List of banks acquired or bankrupted during the Great Recession|Federal takeover of Fannie Mae and Freddie Mac|National City acquisition by PNC|Government intervention during the subprime mortgage crisis|Bailout}}

[[File:Birmingham Northern Rock bank run 2007.jpg|thumb|upright=1.6|People queuing outside a [[Northern Rock]] bank branch in [[Birmingham]], United Kingdom, on September 15, 2007, to [[bank run|withdraw their savings]] because of the subprime crisis<ref>Lusher, A., [https://www.independent.co.uk/news/uk/home-news/northern-rock-shareholders-theresa-may-financial-crisis-10-years-banks-taxpayer-funded-bail-out-a7946586.html "Northern Rock shareholders tell Theresa May 10 years on: 'Give us back the money stolen by the Government'"], ''[[The Independent]]'', September 14, 2017.</ref>]]
Several major financial institutions either failed, were bailed out by governments, or merged (voluntarily or otherwise) during the crisis. While the specific circumstances varied, in general the decline in the value of mortgage-backed securities held by these companies resulted in either their [[insolvency]], the equivalent of [[bank runs]] as investors pulled funds from them, or inability to secure new funding in the credit markets. These firms had typically borrowed and invested large sums of money relative to their cash or equity capital, meaning they were highly [[leveraged]] and vulnerable to unanticipated credit market disruptions.<ref name=BlackburnSMC1 />

The five largest U.S. investment banks, with combined liabilities or debts of $4 trillion, either went bankrupt ([[Lehman Brothers]]), were taken over by other companies ([[Bear Stearns]] and [[Merrill Lynch]]), or were bailed out by the U.S. government ([[Goldman Sachs]] and [[Morgan Stanley]]) during 2008.<ref>{{cite news |url=https://www.nytimes.com/2008/10/03/business/03sec.html |title=Agency's '04 Rule Let Banks Pile Up New Debt |first=Stephen |last=Labaton |date=October 2, 2008 |access-date=October 5, 2017 |newspaper=The New York Times }}</ref> Government-sponsored enterprises (GSE) [[Fannie Mae]] and [[Freddie Mac]] either directly owed or guaranteed nearly $5 trillion in mortgage obligations, with a similarly weak capital base, when they were placed into [[conservatorship]] in September 2008.<ref>[http://www.ofheo.gov/newsroom.aspx?ID=456&q1=0&q2=0 OFHEO-Statement of Director Lockhart] {{webarchive |url=https://web.archive.org/web/20080912172510/http://www.ofheo.gov/newsroom.aspx?ID=456&q1=0&q2=0 |date=September 12, 2008 }}</ref> For scale, this $9 trillion in obligations concentrated in seven highly leveraged institutions can be compared to the $14 trillion size of the U.S. economy (GDP)<ref>{{cite web |url=https://www.bea.gov/national/index.htm#gdp |title=Bureau of Economic Analysis |first=US Department of Commerce, BEA, Bureau of Economic |last=Analysis |website=www.bea.gov |access-date=October 5, 2017}}</ref> or to the total national debt of $10 trillion in September 2008.<ref name="auto"/>

Major depository banks around the world had also used [[financial innovation]]s such as [[structured investment vehicle]]s to circumvent capital ratio regulations.<ref name="ft.com">{{cite news |last=Dinallo |first=Eric |date=30 March 2009 |title=We modernised ourselves into this ice age |website=Financial Times |url=http://www.ft.com/cms/s/0/3b94938c-1d59-11de-9eb3-00144feabdc0.html |access-date=October 5, 2017}}</ref> Notable global failures included [[Northern Rock]], which was nationalized at an estimated cost of £87 billion ($150 billion).<ref>{{cite news |url=https://www.telegraph.co.uk/finance/comment/3161595/Financial-Crisis-Someone-will-have-to-dig-us-out-of-all-this-debt.html |archive-url=https://ghostarchive.org/archive/20220111/https://www.telegraph.co.uk/finance/comment/3161595/Financial-Crisis-Someone-will-have-to-dig-us-out-of-all-this-debt.html |archive-date=2022-01-11 |url-access=subscription |url-status=live |title=Financial Crisis: Someone will have to dig us out of all this debt |newspaper=Daily Telegraph |author=Robert Chote |access-date=October 19, 2008 |location=London |date=October 8, 2008}}{{cbignore}}</ref> In the U.S., [[Washington Mutual]] (WaMu) was seized in September 2008 by the US [[Office of Thrift Supervision]] (OTS).<ref>{{cite news |url=https://www.bloomberg.com/apps/news?pid=20601087&sid=a_WW5ZH_P_A0&refer=home |archive-url=http://wayback.vefsafn.is/wayback/20100312130806/http://www.bloomberg.com/apps/news?pid=20601087&sid=a_WW5ZH_P_A0&refer=home |archive-date=March 12, 2010 |title=Bloomberg.com: Worldwide |publisher=Bloomberg.com |date=September 27, 2008 |access-date=October 6, 2008 }}</ref> This would be followed by the "[[shotgun wedding]]" of [[Wells Fargo]] and [[Wachovia]] after it was speculated that without the merger Wachovia was also going to fail. Dozens of U.S. banks received funds as part of the TARP or $700 billion bailout.<ref>{{Cite web|url=http://www.treas.gov/press/releases/hp1265.htm|archive-url=https://web.archive.org/web/20090506043525/http://www.treas.gov/press/releases/hp1265.htm|title=Paulson Update on TARP|archive-date=May 6, 2009}}</ref> The TARP funds gained some controversy after [[PNC Financial Services]] received TARP money, only to turn around hours later and [[National City acquisition by PNC|purchase]] the struggling [[National City Corp.]], which itself had become a victim of the subprime crisis.

As a result of the financial crisis in 2008, twenty-five U.S. banks became insolvent and were taken over by the [[FDIC]].<ref>{{cite web |url=http://www.fdic.gov/bank/individual/failed/banklist.html |title=Failed Bank List |author=Federal Deposit Insurance Corporation |access-date=June 27, 2009}}</ref> As of August 14, 2009, an additional 77 banks became insolvent.<ref>{{cite web |url=http://www.fdic.gov/news/news/press/2009/index.html |title=FDIC: Press Releases |author=Federal Deposit Insurance Corporation |access-date=July 31, 2009}}</ref> This seven-month tally surpasses the 50 banks that were seized in all of 1993, but is still much smaller than the number of failed banking institutions in 1992, 1991, and 1990.<ref>{{cite web |url=http://www.fdic.gov/bank/statistical/stats/2009mar/fdic.pdf |title=FDIC Trends, March, 2009 |author=Federal Deposit Insurance Corporation |access-date=July 10, 2009}}</ref> The United States has lost over 6 million jobs since the recession began in December 2007.<ref>{{cite news |url=https://www.bloomberg.com/apps/news?pid=20601110&sid=aCbHA.m7rikc |title=Five Banks are Seized |author=Margaret Chadbourn |access-date=June 27, 2009 |work=Bloomberg |date=June 27, 2009 |archive-url=https://web.archive.org/web/20121025070352/http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aCbHA.m7rikc |archive-date=October 25, 2012 }}</ref>

The FDIC deposit insurance fund, supported by fees on insured banks, fell to $13 billion (~${{Format price|{{Inflation|index=US-GDP|value=13000000000|start_year=2009}}}} in {{Inflation/year|US-GDP}}) in the first quarter of 2009.<ref name="Ari Levy and Margaret Chadbourn">{{cite news |url=https://www.bloomberg.com/apps/news?pid=20601087&sid=agpbmkGrsbu4 |title=Bank of Wyoming Seized; 53rd U.S. Failure This Year (Update1) |author1=Ari Levy |author2=Margaret Chadbourn |access-date=July 10, 2009 |work=Bloomberg |date=July 10, 2009 |archive-url=https://web.archive.org/web/20121025082540/http://www.bloomberg.com/apps/news?pid=newsarchive&sid=agpbmkGrsbu4 |archive-date=October 25, 2012 }}</ref> That is the lowest total since September 1993.<ref name="Ari Levy and Margaret Chadbourn"/>

According to some, the bailouts could be traced directly to [[Alan Greenspan]]'s efforts to reflate the stock market and the economy after the tech stock bust, and specifically to a February 23, 2004, speech Mr. Greenspan made to the [[Mortgage Bankers Association]] where he suggested that the time had come to push average American borrowers into more exotic loans with variable rates, or deferred interest.<ref name="Sean Olender">{{cite news |url=http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/03/20/EDG79ONVUI1.DTL |title=The Coming Mortgage Bailout |author=Sean Olender |access-date=March 20, 2007 |work=The San Francisco Chronicle |date=March 20, 2007}}</ref> This argument suggests that Mr. Greenspan sought to enlist banks to expand lending and debt to stimulate asset prices and that the [[Federal Reserve]] and [[US Treasury Department]] would back any losses that might result. As early as March 2007 some commentators predicted that a bailout of the banks would exceed $1 (~${{Format price|{{Inflation|index=US-GDP|value=1000000000|start_year=2007}}}} in {{Inflation/year|US-GDP}}) trillion, at a time when [[Ben Bernanke]], Alan Greenspan and [[Henry Paulson]] all claimed that mortgage problems were "contained" to the subprime market and no bailout of the financial sector would be necessary.<ref name="Sean Olender"/>

===Homeowner assistance===
[[File:Change in household debt - v1.png|thumb|upright=1.6|right|U.S. Changes in Household Debt as a percentage of GDP for 1989–2016. Homeowners paying down debt for 2009–2012 was a headwind to the recovery. Economist [[Carmen Reinhart]] explained that this behavior tends to slow recoveries from financial crises relative to typical recessions.<ref name="After the Fall">{{cite journal |first1=Carmen M. |last1=Reinhart |first2=Vincent R. |last2=Reinhart |title=After the Fall |journal=NBER Working Paper No. 16334 |date=September 2010 |doi=10.3386/w16334 |doi-access=free }}</ref>]]
[[File:U.S. Recovery from Great Recession - Govt Contribution to Pct Chg in Real GDP - v1.png|thumb|upright=1.6|right|U.S. federal government spending was held relatively level around $3.5 trillion from 2009–2014, which created a headwind to recovery, reducing real GDP growth by approximately 0.5% per quarter (annualized) on average between Q3 2010 and Q2 2014.<ref name="Bernanke_Recovery">{{Cite web|url=https://www.federalreserve.gov/newsevents/speech/bernanke20121120a.htm|title=Speech by Chairman Bernanke on the economic recovery and economic policy|website=Board of Governors of the Federal Reserve System}}</ref>]]

Both lenders and borrowers may benefit from avoiding foreclosure, which is a costly and lengthy process. Some lenders have offered troubled borrowers more favorable mortgage terms (''e.g.'', refinancing, loan modification, or [[loss mitigation]]). Borrowers have also been encouraged to contact their lenders to discuss alternatives.<ref>{{cite news |title=Criticism rains down on mortgage industry |url=https://www.usatoday.com/money/economy/housing/2007-10-23-mortgages-refinance_N.htm |access-date=May 19, 2008 |work=USA Today |first1=Noelle |last1=Knox |first2=Sue |last2=Kirchhoff |date=October 23, 2007}}</ref>

''[[The Economist]]'' described the issue this way in February 2009: "No part of the financial crisis has received so much attention, with so little to show for it, as the tidal wave of home foreclosures sweeping over America. Government programmes have been ineffectual, and private efforts not much better." Up to 9 million homes may enter foreclosure over the 2009–2011 period, versus one million in a typical year.<ref>{{cite news |url=https://www.economist.com/world/unitedstates/displaystory.cfm?story_id=13145396 |title=Can't pay or won't pay? |date=February 19, 2009 |access-date=October 5, 2017 |newspaper=The Economist}}</ref> At roughly U.S. $50,000 per foreclosure according to a 2006 study by the [[Chicago Federal Reserve Bank]], 9 million foreclosures represented $450 billion in losses.<ref>{{cite news |url=https://www.nytimes.com/topic/subject/foreclosures-2012-robosigning-and-mortgage-servicing-settlement |title=Foreclosures (2012 Robosigning and Mortgage Servicing Settlement) |access-date=October 5, 2017 |newspaper=The New York Times }}</ref>

A variety of voluntary private and government-administered or supported programs were implemented during 2007–09 to assist homeowners with case-by-case mortgage assistance, to mitigate the foreclosure crisis engulfing the U.S. One example is the [[Hope Now Alliance]], an ongoing collaborative effort between the US Government and private industry to help certain subprime borrowers.<ref>{{cite web |url=http://hopenow.com/leaving-site.php?http://www.fsround.org/hope_now/pdfs/AllianceRelease.pdf |title=HOPE NOW Alliance Created to Help Distressed Homeowners |date=October 10, 2007 |archive-url=https://web.archive.org/web/20110923125650/http://www.fsround.org/media/pdfs/AllianceRelease.pdf |archive-date=September 23, 2011}}</ref> In February 2008, the Alliance reported that during the second half of 2007, it had helped 545,000 subprime borrowers with shaky credit, or 7.7% of 7.1 million subprime loans outstanding as of September 2007. A spokesperson for the Alliance acknowledged that much more must be done.<ref>{{cite news |title=Hope Now says nearly 8% of subprime borrowers helped |url=https://money.cnn.com/2008/02/06/news/economy/loan_modification.ap/index.htm?source=yahoo_quote |date=February 6, 2008 |access-date=May 19, 2008 |work=CNN |archive-url=https://web.archive.org/web/20080210153132/http://money.cnn.com/2008/02/06/news/economy/loan_modification.ap/index.htm?source=yahoo_quote |archive-date=February 10, 2008}}</ref>

During late 2008, major banks and both Fannie Mae and Freddie Mac established moratoriums (delays) on foreclosures, to give homeowners time to work towards refinancing.<ref>{{cite news |url=https://money.cnn.com/2008/10/06/real_estate/Drastic_plan_slashes_mortgage_costs/index.htm?source=yahoo_quote |title=BofA to slash mortgage payments for Countrywide borrowers |publisher=Money.cnn |date=October 6, 2008 |access-date=October 24, 2008 |first=Les |last=Christie}}</ref><ref>{{cite news |first=Les |last=Christie |url=https://money.cnn.com/2008/11/20/real_estate/Fannie_suspends_foreclosures/index.htm?postversion=2008112018 |title=CNN – Fannie & Freddie Suspend Foreclosures |publisher=Money.cnn |date=November 20, 2008 |access-date=February 27, 2009}}</ref><ref>{{cite web |url=http://www.fanniemae.com/newsreleases/2008/4531.jhtml;jsessionid=RGJIT1PN5WB5NJ2FQSISFGQ?p=Media&s=News+Releases |title=Fannie News Release |publisher=Fanniemae.com |year=2008 |access-date=February 27, 2009 |archive-url=https://web.archive.org/web/20110510000530/http://www.fanniemae.com/newsreleases/2008/4531.jhtml%3Bjsessionid%3DRGJIT1PN5WB5NJ2FQSISFGQ?p=Media&s=News+Releases |archive-date=May 10, 2011 }}</ref>

Critics have argued that the case-by-case [[loan modification]] method is ineffective, with too few homeowners assisted relative to the number of foreclosures and with nearly 40% of those assisted homeowners again becoming delinquent within 8 months.<ref name="printerfriendly1">{{cite news |url=https://www.economist.com/world/unitedstates/PrinterFriendly.cfm?story_id=13145239 |title=Economist-Understanding Foreclosure Drivers |publisher=Economist |date=February 19, 2009 |access-date=February 27, 2009}}</ref><ref>{{cite web |url=http://banking.senate.gov/public/_files/HousingandEconomicRecoveryActSummary.pdf |title=Summary of Act |archive-url=https://web.archive.org/web/20080626000254/http://banking.senate.gov/public/_files/HousingandEconomicRecoveryActSummary.pdf |archive-date=June 26, 2008 }}</ref><ref>{{cite news |first=Les |last=Christie |title=No help for 70% of subprime borrowers |work=[[CNNMoney.com]] |publisher=[[Cable News Network]] |url=https://money.cnn.com/2008/04/22/real_estate/no_help_for_most_borrowers/index.htm?cnn=yes |date=April 22, 2008 |access-date=September 17, 2008}}</ref> In December 2008, the U.S. FDIC reported that more than half of mortgages modified during the first half of 2008 were delinquent again, in many cases because payments were not reduced or mortgage debt was not forgiven. This is further evidence that case-by-case loan modification is not effective as a policy tool.<ref>{{cite news |author=Christie, Les |url=https://money.cnn.com/2008/12/23/real_estate/new_modifications_same_problems/index.htm?cnn=yes |title=Most mortgage fixes are bad medicine|publisher=Money.cnn|date=December 23, 2008 |access-date=February 27, 2009}}</ref> In February 2009, economists [[Nouriel Roubini]] and [[Mark Zandi]] (ignoring the impact on lenders, and the alternative advocated by others of providing the money to homeowners) recommended an "across the board" (systemic) reduction of mortgage principal balances by 20–30%. Lowering the mortgage balance would help lower monthly payments and also affect an estimated 20 million homeowners that may have a financial incentive to enter voluntary foreclosure because they are "underwater" (i.e. the mortgage balance is larger than the home value).<ref>{{cite web |url=http://www.charlierose.com/view/interview/10090 |title=Charlie Rose-Roubini-Mortgage Solutions |publisher=Charlierose.com |access-date=February 27, 2009 |archive-url=https://web.archive.org/web/20090222153142/http://www.charlierose.com/view/interview/10090 |archive-date=February 22, 2009 }}</ref><ref>{{cite magazine |url=https://www.forbes.com/2009/02/18/depression-financial-crisis-capitalism-opinions-columnists_recession_stimulus.html |title=Forbes-Roubini |magazine=Forbes.com |date=February 18, 2009 |access-date=February 27, 2009}}</ref> A study by the [[Federal Reserve Bank of Boston]] indicated, however, that banks were reluctant to modify loans. Only 3% of seriously delinquent homeowners had their mortgage payments reduced during 2008. In addition, investors who held MBS and had a say in [[mortgage modification]]s had not been a significant impediment; the study found no difference in the rate of assistance whether the loans were controlled by the bank or by investors. Commenting on the study, economists [[Dean Baker]] and Paul Willen both advocated providing funds directly to homeowners instead of banks.<ref>{{cite news |url=https://www.boston.com/business/articles/2009/07/07/lenders_avoid_redoing_loans_fed_concludes/ |title=Lenders avoid redoing loans, Fed concludes |first=Jenifer B. |last=McKim |date=July 7, 2009 |access-date=October 5, 2017 |newspaper=The Boston Globe }}</ref>

The ''[[Los Angeles Times]]'' reported the results of a study that found homeowners with high [[credit score]]s at the time of entering the mortgage are 50% more likely to "[[strategic default|strategically default]]" – abruptly and intentionally pull the plug and abandon the mortgage – compared with lower-scoring borrowers. Such strategic defaults were heavily concentrated in markets with the highest price declines. An estimated 588,000 strategic defaults occurred nationwide during 2008, more than double the total in 2007. They represented 18% of all serious delinquencies that extended for more than 60 days in the fourth quarter of 2008.<ref>{{cite web |url=https://latimes.com/classified/realestate/news/la-fi-harney20-2009sep20,0,6741264,print.story |title=LA Times-Homeowners who strategically default a growing problem-September 2009 |website=[[Los Angeles Times]] |access-date=October 5, 2017 |archive-date=November 3, 2012 |archive-url=https://web.archive.org/web/20121103075016/http://www.latimes.com/classified/realestate/news/la-fi-harney20-2009sep20,0,6741264,print.story }}</ref>

====Homeowners Affordability and Stability Plan====
{{Main|Homeowners Affordability and Stability Plan}}
On February 18, 2009, U.S. President Barack Obama announced a $73 billion program to help up to nine million homeowners avoid foreclosure, which was supplemented by $200 billion in additional funding for [[Fannie Mae]] and [[Freddie Mac]] to purchase and more easily refinance mortgages. The plan was funded mostly from the EESA's $700 billion financial bailout fund. It used cost sharing and incentives to encourage lenders to reduce homeowner's monthly payments to 31% of their monthly income. Under the program, a lender would be responsible for reducing monthly payments to no more than 38% of a borrower's income, with government sharing the cost to further cut the rate to 31%. The plan also involved forgiving a portion of the borrower's mortgage balance. Companies that service mortgages received incentives to modify loans and to help the homeowner stay current.<ref>{{cite news |url=https://www.bloomberg.com/apps/news?pid=20601087&sid=a7W_kzfPZbzw&refer=home%E2%80%8F |archive-url=https://archive.today/20120722010949/http://www.bloomberg.com/apps/news?pid=20601087&sid=a7W_kzfPZbzw&refer=home%E2%80%8F |archive-date=July 22, 2012 |title=President Obama's Plan |publisher=Bloomberg |date=February 20, 2009 |access-date=February 27, 2009 }}</ref><ref>{{Cite web|url=http://www.treas.gov/initiatives/eesa/homeowner-affordability-plan/FactSheet.pdf|archive-url=https://web.archive.org/web/20090219152954/http://www.treas.gov//initiatives//eesa//homeowner-affordability-plan//FactSheet.pdf|title=Fact Sheet-Homeowners Affordability and Stability Plan|archive-date=February 19, 2009}}</ref><ref>{{cite news |url=https://www.nytimes.com/2009/03/05/business/05housing.html?pagewanted=all |title=U.S. Sets Big Incentives to Head Off Foreclosures |first1=Edmund |last1=L |last2=REWS |date=March 4, 2009 |access-date=October 5, 2017 |newspaper=The New York Times }}</ref>

=====Loan modifications=====
<blockquote>Untold thousands of people have complained in recent years that they were subjected to a nightmare experience of lost paperwork, misapplied fees and Kafkaesque phone calls with clueless customer service representatives as they strived to avoid foreclosures they say were preventable. These claims are backed up by a swelling number of academic studies and insider accounts of misconduct and abuse.<ref>{{Cite web |title=Foreclosure Settlement Still Failing 700,000 Families One Year Later |url=https://huffingtonpost.com/2014/01/22/foreclosure-settlement_n_4638459.html |website=The Huffington Post |date=22 January 2014 |access-date=2015-09-07}}</ref></blockquote>

<blockquote>Now it's becoming clear just how chaotic the whole system became. Depositions from employees working for the banks or their law firms depict a foreclosure process in which it was standard practice for employees with virtually no training to masquerade as vice presidents, sometimes signing documents on behalf of as many as 15 different banks. Together, the banks and their law firms created a quick-and-dirty foreclosure machine that was designed to rush through foreclosures as fast as possible.<ref>{{Cite web |title=Homeowners Wrongfully Foreclosed Upon Go Through Legal Wringer |url=https://huffingtonpost.com/2010/12/08/homeowners-wrongfully-foreclosed-upon_n_794194.html |website=The Huffington Post |access-date=2015-09-07}}</ref></blockquote>

==Regulatory proposals and long-term solutions==
{{Further|Subprime mortgage crisis solutions debate|Regulatory responses to the subprime crisis|}}

President [[Barack Obama]] and key advisers introduced a series of regulatory proposals in June 2009. The proposals address consumer protection, executive pay, bank financial cushions or capital requirements, expanded regulation of the [[shadow banking system]] and [[derivative (finance)|derivatives]], and enhanced authority for the [[Federal Reserve]] to safely wind-down systemically important institutions, among others.<ref>{{cite web |url=https://obamawhitehouse.archives.gov/the_press_office/Remarks-of-the-President-on-Regulatory-Reform/ |title=Remarks of the President on Regulatory Reform &#124; The White House |date=June 17, 2009 |via=[[NARA|National Archives]] |work=[[whitehouse.gov]] |access-date=November 18, 2012}}</ref><ref>{{cite web |url=https://www.washingtonpost.com/wp-dyn/content/article/2009/06/14/AR2009061402443.html |title=Timothy Geithner and Lawrence Summers – The Case for Financial Regulatory Reform |access-date=October 5, 2017 |via=www.washingtonpost.com}}</ref><ref>{{Cite web|url=https://www.treasury.gov/apology/pages/FS/fs404.htm|archive-url=https://web.archive.org/web/20100421184209/http://www.financialstability.gov/roadtostability/regulatoryreform.html|title=Financial Stability|archive-date=April 21, 2010|website=www.treasury.gov}}</ref> The [[Dodd–Frank Wall Street Reform and Consumer Protection Act]] was signed into law in July 2010 to address some of the causes of the crisis.

U.S. Treasury Secretary [[Timothy Geithner]] testified before Congress on October 29, 2009. His testimony included five elements he stated as critical to effective reform:
# Expand the [[Federal Deposit Insurance Corporation]] bank resolution mechanism to include [[non-bank financial institution]]s;
# Ensure that a firm is allowed to fail in an orderly way and not be "rescued";
# Ensure taxpayers are not on the hook for any losses, by applying losses to the firm's investors and creating a monetary pool funded by the largest financial institutions;
# Apply appropriate checks and balances to the FDIC and Federal Reserve in this resolution process;
# Require stronger capital and liquidity positions for financial firms and related regulatory authority.<ref>{{Cite web|url=http://www.ustreas.gov/press/releases/tg335.htm|archive-url=https://web.archive.org/web/20091101092006/http://www.ustreas.gov/press/releases/tg335.htm|title=Secretary Geithner Testimony to House Financial Service Committee-October 29, 2009|archive-date=November 1, 2009}}</ref>

The Dodd-Frank Act addressed these elements, but stopped short of breaking up the largest banks, which grew larger due to mergers of investment banks at the core of the crisis with depository banks (e.g., [[JP Morgan Chase]] acquired [[Bear Stearns]] and [[Bank of America]] acquired [[Merrill Lynch]] in 2008). Assets of five largest banks as a share of total commercial banking assets rose then stabilized in the wake of the crisis.<ref>{{cite web |url=https://research.stlouisfed.org/fred2/graph/?graph_id=146140&category_id= |title=5-Bank Asset Concentration for United States |website=Federal Reserve Bank of St Louis |date=August 30, 2017 |access-date=October 5, 2017}}</ref> During 2013, Senators [[John McCain]] (Republican) and [[Elizabeth Warren]] (Democratic) proposed a bill to separate investment and depository banking, to insulate depository banks from higher risk activities. These were separated prior to the 1999 repeal of the [[Glass-Steagall Act]].<ref>{{cite news |url=https://www.bloomberg.com/news/articles/2013-07-11/warren-joins-mccain-to-push-new-glass-steagall-bill-for-banks |title=Warren Joins McCain to Push New Glass-Steagall Law for Banks |newspaper=Bloomberg |date=July 12, 2013 |access-date=October 5, 2017 |via=www.bloomberg.com}}</ref>

===Law investigations, judicial and other responses===
Significant law enforcement action and litigation resulted from the crisis. The U.S. [[Federal Bureau of Investigation]] probed the possibility of fraud by mortgage financing companies [[Fannie Mae]] and [[Freddie Mac]], [[Lehman Brothers]], and insurer [[American International Group]], among others.<ref>[http://www.foxnews.com/story/0,2933,426783,00.html FBI Investigating Potential Fraud by Fannie Mae, Freddie Mac, Lehman, AIG] {{Webarchive|url=https://web.archive.org/web/20121021123456/http://www.foxnews.com/story/0,2933,426783,00.html |date=October 21, 2012 }}, [[Associated Press]], September 23, 2008.</ref> New York Attorney General Andrew Cuomo sued Long Island based Amerimod, one of the nation's largest loan modification corporations for fraud, and issued numerous subpoenas to other similar companies.<ref>{{cite web |url=http://blogs.villagevoice.com/runninscared/archives/2009/06/cuomo_ill_sue_f.php |title=Cuomo: I'll Sue Foreclosure-Relief Scam Artists |publisher=villagevoice.com |date=June 9, 2009 |access-date=June 9, 2009 |archive-url=https://web.archive.org/web/20090612183938/http://blogs.villagevoice.com/runninscared/archives/2009/06/cuomo_ill_sue_f.php |archive-date=June 12, 2009 }}</ref> The FBI assigned more agents to mortgage-related crimes and its caseload dramatically increased.<ref name="CBS FBI Mortgage Cracks Down">{{cite news |title=FBI Cracks Down On Mortgage Fraud |date=June 19, 2008 |work=[[CBS news]] |url=https://www.cbsnews.com/news/fbi-cracks-down-on-mortgage-fraud/}}</ref><ref>{{cite web |url=https://www.fbi.gov/page2/june08/malicious_mortgage061908.html |title=FBI – Mortgage Fraud Takedown – Press Room – Headline Archives 06–19–08 |publisher=Fbi.gov |access-date=October 26, 2008 |archive-url=https://web.archive.org/web/20081015071159/http://www.fbi.gov/page2/june08/malicious_mortgage061908.html |archive-date=October 15, 2008 }}</ref> The FBI began a probe of [[Countrywide Financial]] in March 2008 for possible fraudulent lending practices and securities fraud.<ref>{{cite news |url=https://money.cnn.com/2008/03/08/news/companies/countrywide_FBI/?postversion=2008031003 |title=FBI probes Countrywide for possible fraud |publisher=Money.cnn.com |date=March 8, 2008 |access-date=February 27, 2009}}</ref>

Several hundred civil lawsuits were filed in federal courts beginning in 2007 related to the subprime crisis. The number of filings in state courts was not quantified but was also believed to be significant.<ref>{{cite news |title=Subprime lawsuits on pace to top S&L cases – The Boston Globe |url=https://www.boston.com/business/articles/2008/02/15/subprime_lawsuits_on_pace_to_top_sl_cases/ |access-date=May 19, 2008 |date=February 15, 2008 |archive-url=https://web.archive.org/web/20080921230708/http://www.boston.com/business/articles/2008/02/15/subprime_lawsuits_on_pace_to_top_sl_cases/ |archive-date=September 21, 2008}}</ref> In August 2014, [[Bank of America]] agreed to a near-$17 billion (~${{Format price|{{Inflation|index=US-GDP|value=17000000000|start_year=2014}}}} in {{Inflation/year|US-GDP}}) deal to settle claims against it relating to the sale of toxic mortgage-linked securities including subprime home loans, in what was believed to be the largest settlement in U.S. corporate history. The deal with the [[U.S. Justice Department]] topped a deal the regulator made the previous year with [[JPMorgan Chase]] over similar issues.<ref name="BAsettlement">{{cite news |title=Bank of America to pay nearly $17 bn to settle mortgage claims |url=http://www.philadelphiaherald.com/index.php/sid/224972439 |date=August 21, 2014 |access-date=August 22, 2014 |publisher=Philadelphia Herald}}</ref> [[Morgan Stanley]] paid $2.6 billion (~${{Format price|{{Inflation|index=US-GDP|value=2600000000|start_year=2015}}}} in {{Inflation/year|US-GDP}}) to settle claims in February 2015, without reaching closure on homeowner relief and state claim.

{{Expand section|date=May 2010}}

===Bank fines and penalties===
U.S. banks have paid considerable fines from legal settlements due to mortgage-related activities. ''The Economist'' estimated that from 2008 through October 2013, U.S. banks had agreed to $95 billion in mortgage-related penalties. Settlement amounts included Bank of America ($47.2B), JP Morgan Chase ($22.3B), Wells Fargo ($9.8B), Citigroup ($6.2B) and Goldman-Sachs ($0.9B).<ref>{{Cite news|url=https://www.economist.com/finance-and-economics/2013/10/24/payback-time-for-subprime|title=Payback time for subprime|date=October 24, 2013|newspaper=The Economist}}</ref> Bloomberg reported that from the end of 2010 to October 2013, the six largest Wall St. banks had agreed to pay $67 billion.<ref>{{cite news |url=https://www.bloomberg.com/news/articles/2013-10-31/banks-finally-pay-for-their-sins-five-years-after-the-crisis |title=Banks Finally Pay for Their Sins, Five Years After the Crisis |date=November 1, 2013 |access-date=October 5, 2017 |via=www.bloomberg.com|newspaper=Bloomberg.com }}</ref> CNBC reported in April 2015 that banking fines and penalties totaled $150 billion between 2007 and 2014, versus $700 billion in profits over that time.<ref>{{cite web |url=https://www.cnbc.com/2015/04/30/7-years-on-from-crisis-150-billion-in-bank-fines-and-penalties.html |title=7 years on from crisis, $150B in fines and penalties |first=John W. |last=Schoen |website=[[CNBC]] |date=April 30, 2015 |access-date=October 5, 2017}}</ref>

Many of these fines were obtained via the efforts of President Obama's Financial Fraud Enforcement Task Force (FFETF), which was created in November 2009 to investigate and prosecute financial crimes. The FFETF involves over 20 federal agencies, 94 U.S. Attorney's offices, and state and local partners. One of its eight working groups, the Residential Mortgage Backed Securities (RMBS) Working Group, was created in 2012 and is involved in investigating and negotiating many of the fines and penalties described above.<ref>{{cite web |url=https://www.justice.gov/opa/pr/residential-mortgage-backed-securities-working-group-members-announce-first-legal-action |title=Residential Mortgage-Backed Securities Working Group Members Announce First Legal Action |website=www.justice.gov |access-date=October 5, 2017|date=October 2, 2012 }}</ref>

==In popular culture==
Several books written about the crisis were made into movies. Examples include ''[[The Big Short]]'' by [[Michael Lewis]] and ''[[Too Big to Fail (book)|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. [[Margin Call]] tells the story of a day's events in an investment bank after its traders realize that their models fail to gauge the market and "the numbers don't add up anymore".

==Implications==
[[File:Put-Backs, Robo-Signers Put New Pressure on US Housing Market VOALearningEnglish.ogv|thumb|VOA Special English Economics Report from October 2010 describing how millions of foreclosed homes were seized by banks|upright=1.6]]

Estimates of impact have continued to climb. During April 2008, [[International Monetary Fund]] (IMF) estimated that global losses for financial institutions would approach $1 (~${{Format price|{{Inflation|index=US-GDP|value=1|start_year=2008}}}} in {{Inflation/year|US-GDP}}) trillion.<ref>{{Cite web|url=http://www.finfacts.com/irishfinancenews/article_1013133.shtml|title=Finfacts: Irish business, finance news on economics|website=www.finfacts.com}}</ref> One year later, the IMF estimated cumulative losses of banks and other financial institutions globally would exceed $4 trillion.<ref>{{cite web |url=http://www.imf.org/External/Pubs/FT/GFSR/2009/01/pdf/summary.pdf |title=IMF Summary |access-date=October 5, 2017}}</ref>

[[Francis Fukuyama]] has argued that the crisis represents the end of [[Reaganism]] in the financial sector, which was characterized by lighter regulation, pared-back government, and lower taxes. Significant financial sector regulatory changes are expected as a result of the crisis.<ref>{{cite web |url=http://www.newsweek.com/id/162401 |title=Fukuyama: The End of America Inc &#124; Newsweek Business &#124; Newsweek.com |publisher=Newsweek.com |date= October 4, 2008|access-date=October 24, 2008}}</ref>

[[Fareed Zakaria]] believes that the crisis may force Americans and their government to live within their means. Further, some of the best minds may be redeployed from [[financial engineering]] to more valuable business activities, or to science and technology.<ref>{{cite web |url=http://www.newsweek.com/id/163449/page/1 |title=Zakaria: A More Disciplined America &#124; Newsweek Business &#124; Newsweek.com |publisher=Newsweek.com |access-date=October 24, 2008 |archive-date=October 15, 2008 |archive-url=https://web.archive.org/web/20081015074234/http://www.newsweek.com/id/163449/page/1 |url-status=dead }}</ref>

[[Roger Altman]] wrote that "the crash of 2008 has inflicted profound damage on [the U.S.] financial system, its economy, and its standing in the world; the crisis is an important geopolitical setback...the crisis has coincided with historical forces that were already shifting the world's focus away from the United States. Over the medium term, the United States will have to operate from a smaller global platform – while others, especially China, will have a chance to rise faster."<ref name="foreignaffairs1"/>

[[GE]] CEO [[Jeffrey Immelt]] has argued that U.S. trade deficits and budget deficits are unsustainable. America must regain its competitiveness through innovative products, training of production workers, and business leadership. He advocates specific national goals related to energy security or independence, specific technologies, expansion of the manufacturing job base, and net exporter status.<ref>{{Cite web|url=http://www.charlierose.com/view/interview/10412|archive-url=https://web.archive.org/web/20090627192918/http://www.charlierose.com/view/interview/10412|title=Charlie Rose – Immelt Interview|archive-date=June 27, 2009}}</ref> "The world has been reset. Now we must lead an aggressive American renewal to win in the future." Of critical importance, he said, is the need to focus on technology and manufacturing. "Many bought into the idea that America could go from a technology-based, export-oriented powerhouse to a services-led, consumption-based economy—and somehow still expect to prosper," Immelt said. "That idea was flat wrong."<ref>{{Cite web|url=http://www.gereports.com/american-renewal-immelt-addresses-detroit-econ-club/|archive-url=https://web.archive.org/web/20090703063640/http://www.gereports.com/american-renewal-immelt-addresses-detroit-econ-club|title=Immelt Comments at Detroit Econ Club|archive-date=July 3, 2009}}</ref>

Economist Paul Krugman wrote in 2009: "The prosperity of a few years ago, such as it was—profits were terrific, wages not so much – depended on a huge bubble in housing, which replaced an earlier huge bubble in stocks. And since the housing bubble isn't coming back, the spending that sustained the economy in the pre-crisis years isn't coming back either."<ref>{{cite news |url=https://www.nytimes.com/2008/12/22/opinion/22krugman.html |title=Opinion – Life Without Bubbles |first=Paul |last=Krugman |date=December 22, 2008 |access-date=October 5, 2017 |newspaper=The New York Times }}</ref> [[Niall Ferguson]] stated that excluding the effect of home equity extraction, the U.S. economy grew at a 1% rate during the Bush years.<ref>{{cite news |url=https://www.theglobeandmail.com/report-on-business/there-will-be-blood/article4293173/?page=all |title=There will be blood |access-date=October 5, 2017 |newspaper=The Globe and Mail|date=24 February 2009 |last1=Scoffield |first1=Heather }}</ref> [[Microsoft]] CEO [[Steve Ballmer]] has argued that this is an economic reset at a lower level, rather than a recession, meaning that no quick recovery to pre-recession levels can be expected.<ref>{{cite web |url=http://www.realclearmarkets.com/video/2009/06/30/ballmer_economy_has_reset.html |title=Ballmer: Economy Has Reset |website=www.realclearmarkets.com |access-date=October 5, 2017}}</ref>

The U.S. Federal government's efforts to support the global financial system have resulted in significant new financial commitments, totaling $7 trillion by November 2008. These commitments can be characterized as investments, loans, and loan guarantees, rather than direct expenditures. In many cases, the government purchased financial assets such as commercial paper, mortgage-backed securities, or other types of asset-backed paper, to enhance [[liquidity]] in frozen markets.<ref>{{cite news |author=David Goldman |url=https://money.cnn.com/2008/11/26/news/economy/where_bailout_stands/index.htm?postversion=2008112813 |title=CNN-Bailout Summary |work=CNNMoney |date=November 26, 2008 |access-date=February 27, 2009}}</ref> As the crisis has progressed, the Fed has expanded the collateral against which it is willing to lend to include higher-risk assets.<ref>{{cite news |url=https://www.bloomberg.com/apps/news?pid=20601087&sid=akZVTnBs66uY&refer=home |title=Bloomberg Article |date=September 19, 2008 |archive-url=https://web.archive.org/web/20121024040401/http://www.bloomberg.com/apps/news?pid=newsarchive&sid=akZVTnBs66uY&refer=home |archive-date=October 24, 2012 }}</ref>

[[The Economist]] wrote in May 2009: "Having spent a fortune bailing out their banks, Western governments will have to pay a price in terms of higher taxes to meet the interest on that debt. In the case of countries (like Britain and America) that have trade as well as budget deficits, those higher taxes will be needed to meet the claims of foreign creditors. Given the political implications of such austerity, the temptation will be to default by stealth, by letting their currencies depreciate. Investors are increasingly alive to this danger..."<ref>{{cite news |url=https://www.economist.com/finance/displayStory.cfm?story_id=13653915&source=hptextfeature |title=Birth pains |date=May 14, 2009 |access-date=October 5, 2017 |newspaper=The Economist}}</ref>

The crisis has cast doubt on the legacy of [[Alan Greenspan]], the Chairman of the Federal Reserve System from 1986 to January 2006. Senator [[Chris Dodd]] claimed that Greenspan created the "[[perfect storm]]".<ref>{{cite web |title=FT.com / Companies / US & Canada – Fed rapped over subprime loans |url=http://www.ft.com/cms/s/66d98aea-d8e4-11db-a759-000b5df10621,Authorised=false.html?_i_location=http://www.ft.com/cms/s/66d98aea-d8e4-11db-a759-000b5df10621.html&_i_referer=http://ftalphaville.ft.com/blog/2007/03/23/3374/fed-t |access-date=May 19, 2008 |year=2008 }}{{dead link|date=July 2019|bot=medic}}{{cbignore|bot=medic}}</ref> When asked to comment on the crisis, Greenspan spoke as follows:<ref name="WallStreetJournal" />

{{quote|The current credit crisis will come to an end when the overhang of inventories of newly built homes is largely liquidated, and home price deflation comes to an end. That will stabilize the now-uncertain value of the home equity that acts as a buffer for all home mortgages, but most importantly for those held as collateral for [[residential mortgage-backed securities]]. Very large losses will, no doubt, be taken as a consequence of the crisis. But after a period of protracted adjustment, the U.S. economy, and the world economy more generally, will be able to get back to business.}}

=== Post Recession Home Ownership by Millennials ===
Following the recession of the 2008–2010 era, there became a bigger focus from [[millennials]] on how mortgages affect their personal finances. Most who were of working age were unable to find employment that would allow them to save enough for a house. The lack of good employment opportunities has created questions among this generation about how much of their lives that they are willing to invest into a home and if that money is not better spent elsewhere. Mortgage Magnitude<ref>{{Cite web|url=https://nation.maps.arcgis.com/apps/Cascade/index.html?appid=de7f932e3a1d494f9c9d9a67fb0de646|title=Mortgage Magnitude How Many Years of Life Does That House Cost? The Relative Dreaminess of the American Dream|access-date=April 25, 2018}}</ref> looks at how many years of life a mortgage will actually cost a consumer given the area's median income and median home value, showing homes in metropolitan areas ranging from ratios of 1:5 to 1:10. Donna Fancher researched to find if the "[[American Dream]]" of owning a home is still a realistic goal, or if it is continually shrinking for the youth of the US, writing:

{{quote|The value of owner-occupied housing also exceeds income growth. In many markets, prospective buyers are continuing to rent due to concerns over affordability. However, demand also increases rent disproportionately."<ref>{{Cite web|url=https://arcgis-content.maps.arcgis.com/apps/Cascade/index.html?appid=49952831812243bdaa0a169cda0bd126|title=Is the American Dream Still Affordable?|website=arcgis-content.maps.arcgis.com|access-date=April 25, 2018}}</ref>}}

While housing prices fell dramatically during the recession, prices have been steadily coming back to pre-recession prices; with a rising [[interest rate]], home ownership could continue to be challenging for millennials. [[Jason Furman]] wrote:

{{quote|[...] while the unemployment rate for those over 34 peaked at about 8 percent, the unemployment rate among those between the ages of 18 and 34 peaked at 14 percent in 2010 and remains elevated, despite substantial improvement; delinquency rates on student loans have risen several percentage points since the Great Recession and even into the recovery; and the homeownership rate among young adults has dropped from a peak of 43 percent in 2005 to 37 percent in 2013 concurrent with a large increase in the share living with their parents.<ref>{{Cite journal|last1=Furman|first1=Jason|last2=Chairman, Council of Economic Advisers|date=July 24, 2014|title=America's Millennials in the Recovery|url=https://obamawhitehouse.archives.gov/sites/default/files/docs/americas_millenials_in_the_recovery_jf_7.24.14.pdf|via=[[NARA|National Archives]]|journal=[[whitehouse.gov]]}}</ref>}}

==Recovery==
===In the United States===
[[File:U.S. economic recovery scorecard.png|thumb|upright=1.6|Several major U.S. economic variables had recovered from the 2007–2009 Subprime mortgage crisis and [[Great Recession]] by the 2013–2014 time period.]]
[[File:Middle class net worth.png|thumb|upright=1.6|U.S. median family net worth peaked in 2007, declined due to the Great Recession until 2013, and only partially recovered by 2016.<ref>{{Cite web|url=https://www.federalreserve.gov/econres/scfindex.htm|title=Federal Reserve Board – Survey of Consumer Finances (SCF)|website=Board of Governors of the Federal Reserve System|access-date=2018-09-14|archive-date=2020-10-30|archive-url=https://web.archive.org/web/20201030023018/https://www.federalreserve.gov/econres/scfindex.htm}}</ref>]]
The recession officially ended in the second quarter of 2009,<ref name="NBERSEP2010">{{cite web|url=https://www.nber.org/cycles/sept2010.html|title=Business Cycle Dating Committee, National Bureau of Economic Research}}</ref> but the nation's economy continued to be described as in an "[[economic malaise]]" during the second quarter of 2011.<ref name=NYT>{{cite news|last=Appelbaum|first=Binyamin|title=Stimulus by Fed Is Disappointing, Economists Say|url=https://www.nytimes.com/2011/04/24/business/economy/24fed.html|access-date=April 24, 2011|newspaper=The New York Times|date=April 24, 2011|quote=the disappointing results [of the actions of the Federal Reserve] show the limits of the central bank's ability to lift the nation from its economic malaise.| archive-url= https://web.archive.org/web/20110502085423/http://www.nytimes.com/2011/04/24/business/economy/24fed.html| archive-date=May 2, 2011<!--DASHBot-->| url-status= live}}</ref> Some economists described the post-recession years as the weakest [[Economic recovery|recovery]] since the [[Great Depression]] and [[World War II]].<ref>{{cite news |title=Economy Recovery Ranks as Weakest since World War II |author=Paul Wiseman |url=http://www.utsandiego.com/news/2012/aug/26/tp-economic-recovery-ranks-as-weakest-since-world/ |agency=Associated Press |newspaper=San Diego Union Tribune |date=August 26, 2012 |access-date=August 27, 2012}}</ref><ref>{{cite news |title=Weak recovery leaves laid-off US workers struggling to find new jobs; most take pay cuts |author=Christopher S. Rugaber |url=https://www.washingtonpost.com/politics/weak-recovery-leaves-most-laid-off-us-workers-struggling-to-find-new-jobs-most-take-pay-cuts/2012/08/24/8ff3da2e-ee01-11e1-b624-99dee49d8d67_story.html |archive-url=https://wayback.archive-it.org/all/20120827222033/http://www.washingtonpost.com/politics/weak-recovery-leaves-most-laid-off-us-workers-struggling-to-find-new-jobs-most-take-pay-cuts/2012/08/24/8ff3da2e-ee01-11e1-b624-99dee49d8d67_story.html |archive-date=August 27, 2012 |agency=Associated Press |newspaper=Washington Post |date=August 24, 2012 |access-date=August 27, 2012 }}</ref> The weak economic recovery has led many to call it a "Zombie Economy", so-called because it is neither dead nor alive. [[Household income in the United States|Household incomes]], as of August 2012, had fallen more since the end of the recession, than during the 18-month recession, falling an additional 4.8% since the end of the recession, totally to 7.2% since the December 2007 level.<ref>{{cite news |title=U.S. Incomes Fell More In Recovery, Sentier Says |author=Jeff Kearns |url=https://www.bloomberg.com/news/2012-08-23/u-s-incomes-feel-more-in-recovery-sentier-says.html |newspaper=Bloomberg |date=August 23, 2012 |access-date=September 4, 2012}}</ref> Additionally as of September 2012, the [[long-term unemployment]] was the highest it had been since World War II,<ref>{{cite news |title=State of the labor force under pressure this holiday |author=Jon Talton |url=http://seattletimes.com/html/businesstechnology/2019032814_biztaltoncol02xml.html |newspaper=[[The Seattle Times]] |date=September 4, 2012 |access-date=September 4, 2012}}</ref> and the [[unemployment rate]] peaked several months after the end of the recession (10.1% in October 2009) and was above 8% until September 2012 (7.8%).<ref>{{cite web |url=http://www.heritage.org/research/reports/2012/08/not-looking-for-work-why-labor-force-participation-has-fallen-during-the-recession |archive-url=https://web.archive.org/web/20120901080558/http://www.heritage.org/research/reports/2012/08/not-looking-for-work-why-labor-force-participation-has-fallen-during-the-recession |url-status=unfit |archive-date=September 1, 2012 |title=Not Looking for Work: Why Labor Force Participation Has Fallen During the Recession |author=James Sherk |date=August 30, 2012 |work=Reports |publisher=The Heritage Foundation |access-date=September 4, 2012}}</ref><ref>{{cite news |title=THE RACE: After convention speeches end and balloons drop, nation faces cold realism on jobs |url=https://www.washingtonpost.com/politics/the-race-after-convention-speeches-end-and-balloons-drop-nation-faces-cold-realism-on-jobs/2012/09/04/2b3f6a50-f6ba-11e1-a93b-7185e3f88849_story.html |agency=Associated Press |newspaper=Washington Post |date=September 4, 2012 |access-date=September 4, 2012 |archive-url=https://web.archive.org/web/20120911173015/http://www.washingtonpost.com/politics/the-race-after-convention-speeches-end-and-balloons-drop-nation-faces-cold-realism-on-jobs/2012/09/04/2b3f6a50-f6ba-11e1-a93b-7185e3f88849_story.html |archive-date=September 11, 2012}}</ref> The Federal Reserve kept interest rates at a historically low 0.25% from December 2008 until December 2015, when it began to raise them again.

However, the Great Recession was different in kind from all the recessions since the Great Depression, as it also involved a banking crisis and the de-leveraging (debt reduction) of highly indebted households. Research indicates recovery from financial crises can be protracted, with lengthy periods of high unemployment and substandard economic growth.<ref name="bloomberg.com"/> Economist [[Carmen Reinhart]] stated in August 2011: "Debt de-leveraging [reduction] takes about seven years ... And in the decade following severe financial crises, you tend to grow by 1 to 1.5 percentage points less than in the decade before, because the decade before was fueled by a boom in private borrowing, and not all of that growth was real. The unemployment figures in advanced economies after falls are also very dark. Unemployment remains anchored about five percentage points above what it was in the decade before."<ref name="After the Fall" /><ref>{{cite news|url=https://www.washingtonpost.com/business/economy/double-dip-or-just-one-big-economic-dive/2011/08/05/gIQANKAIxI_story.html|title=Double dip, or just one big economic dive?|newspaper=Washington Post}}</ref>

Then-Fed Chair [[Ben Bernanke]] explained during November 2012 several of the economic headwinds that slowed the recovery:
*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.<ref name="Bernanke_Recovery"/>

For example, U.S. federal spending rose from 19.1% GDP in fiscal year (FY) 2007 to 24.4% GDP in FY2009 (the last year budgeted by President Bush) before falling towards to 20.4% GDP in 2014, closer to the historical average. In dollar terms, federal spending was actually higher in 2009 than in 2014, despite a historical trend of a roughly 5% annual increase. This reduced real GDP growth by approximately 0.5% per quarter on average between Q3 2010 and Q2 2014.<ref>[https://www.cbo.gov/about/products/budget-economic-data#2 CBO Historical Tables-Retrieved March 24, 2018]</ref> Both households and government practicing austerity at the same time was a recipe for a slow recovery.<ref name="Bernanke_Recovery"/>

Several key economic variables (e.g., Job level, real GDP per capita, household net worth, and the federal budget deficit) hit their low point (trough) in 2009 or 2010, after which they began to turn upward, recovering to pre-recession (2007) levels between late 2012 and May 2014 (close to Reinhart's prediction), which marked the recovery of all jobs lost during the recession.<ref name="fred.stlouisfed.org"/><ref name="https"/><ref>{{cite web |url=https://fred.stlouisfed.org/series/A939RX0Q048SBEA|title=Real gross domestic product per capita |website=Federal Reserve Bank of St Louis |date=June 28, 2018}}</ref><ref>{{cite web |url=https://fred.stlouisfed.org/series/FYFSGDA188S|title=Federal Surplus or Deficit [-] as Percent of Gross Domestic Product |website=Federal Reserve Bank of St Louis |date=March 28, 2018}}</ref> Real median household income fell to a trough of $53,331 in 2012, but recovered to an all-time high of $59,039 by 2016.<ref>{{cite web |url=https://fred.stlouisfed.org/series/MEHOINUSA672N|title=Real Median Household Income in the United States |website=Federal Reserve Bank of St Louis |date=September 13, 2017}}</ref> However, the gains during the recovery were very unevenly distributed. Economist [[Emmanuel Saez]] wrote in June 2016 that the top 1% of families captured 52% of the total real income (GDP) growth per family from 2009–2015. The gains were more evenly distributed after the tax increases in 2013 on higher-income earners.<ref>[[Emmanuel Saez|Saez, E.]], ''Striking it Richer: The Evolution of Top Incomes in the United States'' (Berkeley: University of California, 2013), [https://eml.berkeley.edu/~saez/saez-UStopincomes-2015.pdf p. 1].</ref>{{rp|1}}

President Obama declared the bailout measures started under the Bush administration and continued during his administration as completed and mostly profitable as of December 2014.<ref>{{cite news|url=https://www.nytimes.com/2014/12/20/business/us-signals-end-of-bailouts-of-automakers-and-wall-street.html?_r=0|title=U.S. Declares Bank and Auto Bailouts Over, and Profitable|website=[[The New York Times]]|date=19 December 2014 |last1=Weisman |first1=Jonathan }}</ref> As of January 2018, 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 $87B profit.<ref name="projects.propublica.org"/>

==See also==
{{Portal|Business and economics|Banks}}
{{columns-start}}
* [[2010 United States foreclosure crisis]]
* ''[[American Casino (film)|American Casino]]'', documentary film about the crisis
* [[American International Group]]
* [[Bear Stearns]]
* [[Collateralized debt obligation#Subprime mortgage boom]]
* [[Community Reinvestment Act]]
* [[Diamond–Dybvig model]]
* [[Fair value accounting and the subprime mortgage crisis]]
* [[2008 financial crisis]]
* [[Financial Crisis Inquiry Commission]]
* ''[[Inside Job (2010 film)|Inside Job]]'', documentary film about the crisis
* [[Great Recession]]
* [[Late 2000s recession]]
* [[List of entities involved in 2007–2008 financial crises]]
* [[List of largest U.S. bank failures]] (many were caused or related to this crisis)
* [[Long-Term Capital Management]]
* [[Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp.]]
* [[Mortgage-backed security]]
* [[National City acquisition by PNC]], the [[merger]] of [[PNC Financial Services]] and [[National City Corp.]] after National City became a victim of the subprime crisis.
* [[Nationalisation of Northern Rock]]
* [[Ownership society]]
* [[Real estate bubble]]
* [[Panic of 1837]]
* [[Panic of 1907]]
* [[Predatory lending]]
* [[Savings and loan crisis]] of the late 1980s.
* [[Securitization]]
* [[Shadow banking system]]
* [[Subprime mortgage crisis solutions debate]]
* [[Toxic security]]
* [[Troubled Assets Relief Program]]
* [[United States housing bubble]]
* [[White collar crime]]
{{column}}

===Other housing bubbles===
* [[Irish property bubble]]
* [[Japanese asset price bubble]]
* [[Spanish property bubble]]
* [[Swedish banking rescue]]
* [[United Kingdom housing bubble]]
{{columns-end}}

==References==
{{Reflist|30em}}
;Bibliography
* {{Cite report |url=https://www.govinfo.gov/content/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf |title=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 |date=2011 |publisher=[[Financial Crisis Inquiry Commission]] | ref = {{harvid|FCIC|2011}}}}

==Further reading==
{{Refbegin|33em}}
*Archaya and Richardson. ''Financial Stability: How to Repair a Failed System'' [http://media.wiley.com/assets/1706/87/NYU_Stern_Executive_Summaries.pdf NYU Stern Project-Executive Summaries of 18 Crisis-Related Papers].
* {{Cite journal |last=Blackburn |first=Robin |author-link=Robin Blackburn |title=The Subprime Crisis |journal=[[New Left Review]] |volume=II |issue=50 |date=March–April 2008 |url=http://newleftreview.org/II/50/robin-blackburn-the-subprime-crisis }}
* Demyanyk, Yuliya ([[Federal Reserve Bank of St. Louis|FRB St. Louis]]), and Otto Van Hemert (NYU [[Stern School]]) (2008) "[https://ssrn.com/abstract=1020396 Understanding the Subprime Mortgage Crisis]," Working paper circulated by the [[Social Science Research Network]].
* DiMartino, D., and Duca, J. V. (2007) "[http://www.dallasfed.org/assets/documents/research/eclett/2007/el0711.pdf The Rise and Fall of Subprime Mortgages] {{Webarchive|url=https://web.archive.org/web/20161210150815/https://dallasfed.org/assets/documents/research/eclett/2007/el0711.pdf |date=2016-12-10 }}," [[Federal Reserve Bank of Dallas]] ''Economic Letter'' 2(11).
*Ely, Bert (2009) "[https://web.archive.org/web/20090810132721/http://www.cato.org/pubs/journal/cj29n1/cj29n1-8.pdf Bad Rules Produce Bad Outcomes: Underlying Public-Policy Causes of the U.S. Financial Crisis]," ''[[Cato Journal]]'' 29(1).
* Hellwig, Martin F. Systemic risk in financial sector: an analysis of subprime-mortgage financial crisis. De Economist (2009) 157:129–207. DOI 10.1007/s10645-009-9110-0.* [[Michael Lewis]], "[http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom The End]," ''Portfolio Magazine'' (November 11, 2008).
*{{cite book |author=Lewis, Michael |title=The Big Short: Inside the Doomsday Machine |publisher=[[Allen Lane]] |location=London |year=2010 |isbn=978-0-393-07223-5}}.
*{{cite book |author1=Muolo, Paul |author2=Padilla, Matthew |title=Chain of Blame: How Wall Street Caused the Mortgage and Credit Crisis |publisher=[[John Wiley and Sons]]|location=Hoboken, NJ |year=2008|isbn=978-0-470-29277-8|title-link=Chain of Blame}}
* Reinhart, Carmen M., and [[Kenneth Rogoff]] (2008) "[https://web.archive.org/web/20080216030158/http://www.economics.harvard.edu/faculty/rogoff/files/Is_The_US_Subprime_Crisis_So_Different.pdf Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison]," [[Harvard University]] working paper.
* [[James B. Stewart|Stewart, James B.]], "Eight Days: the battle to save the American financial system", [[The New Yorker]] magazine, September 21, 2009.
*[http://www.nybooks.com/articles/22280 Review of Mark Zandi's book ''Financial Shock: A 360° Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis''] from ''[[The New York Review of Books]]''.
* [[Mark Zandi|Zandi, M. M.]], ''Financial Shock: Global Panic and Government Bailouts—How We Got Here and What Must Be Done to Fix It'' ([[Upper Saddle River]]: [[FT Press]], 2009), chapter 1: [https://web.archive.org/web/20110917170025/http://www.economy.com/mark-zandi/financial-shock/financial-shock.pdf "Subprime Précis"].
{{Refend}}

==External links==
{{Commons category|Mortgage crisis}}
*[http://www.fcic.gov/ Financial Crisis Inquiry Commission – Homepage]
*[https://www.govinfo.gov/content/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf Report of Financial Crisis Inquiry Commission-January 2011]
*[http://fcic.law.stanford.edu/resource/graphics FCIC – Graphics Page]
*[http://www.federalreservehistory.org/Events/DetailView/55 Federal Reserve-Subprime Mortgage Crisis History Page] {{Webarchive|url=https://web.archive.org/web/20151209132650/http://www.federalreservehistory.org/Events/DetailView/55 |date=December 9, 2015 }}
*[https://fraser.stlouisfed.org/timeline/financial-crisis Federal Reserve-Timeline of the financial crisis]
* Reuters: [https://web.archive.org/web/20090925065705/http://widerimage.reuters.com/timesofcrisis/ Times of Crisis] – multimedia interactive charting the year of global change
*[https://www.pbs.org/wgbh/pages/frontline/meltdown/ PBS Frontline – Inside the Meltdown]
*[http://www.pbs.org/wgbh/frontline/article/dig-deeper-what-you-need-to-know-about-the-financial-crisis/ PBS – What You Need to Know About the Crisis]
* {{cite news |date=December 1, 2008 |title=Government warned of mortgage meltdown Regulators ignored warnings about risky mortgages, delayed regulations on the industry |publisher=CNN |url=https://money.cnn.com/2008/12/01/news/ignored_warnings.ap/index.htm |access-date=May 24, 2010 |archive-url=https://web.archive.org/web/20081216074634/http://money.cnn.com/2008/12/01/news/ignored_warnings.ap/index.htm |archive-date=December 16, 2008}}
* {{cite news |url=http://news.bbc.co.uk/2/hi/business/7073131.stm |title=The US sub-prime crisis in graphics |date=November 21, 2007 |publisher=BBC}}
* CNN Scorecard of Bailout Funds at [https://money.cnn.com/news/specials/storysupplement/bailout_scorecard/index.html CNN Bailout Allocations & Payments]
* [https://archive.today/20121210205412/http://www.bu.edu/phpbin/buniverse/videos/view/?id=346 The Economic Crisis: Its Origins and the Way Forward] Video of lecture given by Marshall Carter, chairman of the New York Stock Exchange, at Boston University, April 15, 2009
*[https://web.archive.org/web/20110511212948/http://72.5.117.181/economica/stories/viewStory?storyid=3667 The True American Dream] Home Ownership, the Subprime Lending Crisis, and Financial Instability by Masum Momaya – International Museum of Women
*Lectures by [[Ben Bernanke]] to an economics class at [[George Washington University]] March 2012
**[https://www.youtube.com/watch?v=E3fFg8XIS0k "Chairman Ben Bernanke Lecture Series Part 1"] Recorded live on March 20, 2012, 10:35am MST
**[https://www.youtube.com/watch?v=bw0qrC4FB_I "Chairman Ben Bernanke Lecture Series Part 2"] Recorded live on March 22, 2012, 10:35am MST
**[https://www.youtube.com/watch?v=GLoqPm1nYRU "Chairman Ben Bernanke Lecture Series Part 3"] Recorded live on March 27, 2012, 10:38am MST
**[https://www.youtube.com/watch?v=mWl6JI4KBTg "Chairman Ben Bernanke Lecture Series Part 4"] Recorded live on March 29, 2012, 10:38am MST

{{Subprime mortgage crisis}}
{{2008 economic crisis}}
{{Financial crises}}
{{Real estate}}
{{Presidency of George W. Bush}}
{{Presidency of Barack Obama}}

{{DEFAULTSORT:Subprime Mortgage Crisis}}
[[Category:Subprime mortgage crisis| ]]
[[Category:2007 in economic history]]
[[Category:2008 in economic history]]
[[Category:2009 in economic history]]
[[Category:2010 in economic history]]
[[Category:Mortgage-backed security]]
[[Category:Financial crises]]
[[Category:Articles containing video clips]]
[[Category:Presidency of George W. Bush]]
[[Category:Presidency of Barack Obama]]