Subprime Mortgage Crisis

The Subprime Mortgage Crisis was a financial collapse rooted in the U.S. housing market that escalated into the Global Financial Crisis of 2007–2009. "Subprime" mortgages were home loans extended to borrowers with weak credit histories, often featuring adjustable rates, low or no documentation requirements, and minimal down payments. During the early 2000s, low Federal Reserve interest rates, lax underwriting, and rising house prices fueled a boom in such lending.

Lenders packaged these mortgages into mortgage-backed securities (MBS) and collateralized debt obligations (CDOs), which credit rating agencies frequently rated AAA. These instruments were sold to banks, pension funds, and investors worldwide, distributing housing risk across the global financial system. Credit default swaps, sold heavily by firms like AIG, were used to insure these securities but were themselves under-collateralized.

When U.S. house prices peaked in 2006 and began falling, adjustable-rate mortgages reset to higher payments, defaults surged, and the value of MBS and CDOs collapsed. Key inflection points included:

• August 2007: BNP Paribas froze three funds exposed to U.S. subprime debt, marking the start of the liquidity crunch.
• March 2008: Bear Stearns was sold to JPMorgan Chase with Federal Reserve backing.
• September 15, 2008: Lehman Brothers filed for bankruptcy, the largest in U.S. history.
• October 2008: The U.S. Congress passed the Troubled Asset Relief Program (TARP), authorizing up to $700 billion in support.

The crisis caused millions of foreclosures, sharp contractions in global GDP, and bank rescues from Iceland to Ireland. Policy responses included the Dodd-Frank Wall Street Reform and Consumer Protection Act (2010) in the U.S. and the Basel III capital standards internationally. The episode reshaped debates on financial regulation, macroprudential policy, and the role of central banks as lenders of last resort.