Eli5: how did the 2008 make people lose their houses?

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I read in many articles that 2008 crash caused millions of people losing their house. What was the crash actually and how did it cause people to lose their houses?

Edit: woah this blew up, thank you for all the answers!! I sorta got it now. People lose home because they’re defaulted. Lots of defaults = “mortgage bond” (cmiiw) values become worthless = everyone panic selling = crash = companies lose money = lots of people got laid off = even more people defaulted.

That’s scary! I hope people learned something from the events. But I read from some comments that it might happen again so that sucks.

Hope everyone is doing fine!!

In: 7953

Watch the Folding Ideas Youtube video ‘Line Goes Up’. The bulk of it is on Cryptocurrency and NFTs, but the first 15 minutes are a fantastic explainer in to how the crash happened.

Essentially, banks realised they could group a set of mortgages in to a bond and sell it to other financial companies, they became very profitable for the banks.
The mortgages had a great introductory rate which mean a mortgage that would normally cost a few thousand dollars was only a few hundred for the first few years.

Quick note in case you don’t know what a mortgage is; it’s a loan a bank gives you with the understanding that if you do not pay it off (default), the bank are legally allowed to take the house to attempt to reclaim their cost.

The banks selling the bonds were the same banks approving the mortgages, and also givng property developers financibg so they could build more houses, meaning the banks could sell more mortgages for the new houses. How could this possibly fail?

(This also meant that the houses being built were all relatively high value suburban family homes, because they were the most profitable once the mortgage was packaged in to a bond.)

Added to this, property speculators and landlord that kept on buying up the new houses, which meant that the proce of houses didn’t drop despite the vastly increased supply.

In 2008 the introductory rates ran out – suddenly the homeowners, speculators or genuine, couldn’t afford their own mortgages and defaulted (stopped paying). When enough mortgages within a bond defaulted, the bonds failed.

So the banks were fucked, but the bonds also formed a large part of the investment portfolio for organisations such as pension funds, so suddenly pensions went up in smoke too.

It was the result of incompetence and mendacity on an industry-level scale.

There’s a lot of really incomplete answers here.

The main problems from the buyer/homeowner side were twofold. The simplest is that the financial collapse caused people to lose their incomes, whether from losing their jobs, or from losing their pensions (pensions invested heavily in the real estate market which was deemed to be much safer than it actually was)

The more complicated was that home buyers were taking on very big mortgages. To keep these mortgages affordable, banks offered a few deals. One was just some introductory offer that would give them a break on early interest rates or payments. The other was a “variable interest loan” which is a loan that can change in interest rate over time. These rated are usually lower than fixed interest rate loans, with the risk that they can go up to way more than their initial rate, so they’re risky. Banks and government promoted these loans as an easy way to buy houses. They also told people not to worry about future payments because home values were going up so much that if things got difficult they could refinance and get a lower rate.

In reality, the market collapsed. People lost jobs and pensions. Interest rates went way up (making mortgage payments more expensive). Home values went way down (which eliminated the option to refinance or borrow against one’s home value). So many many people couldnt make their mortgage payments. When that happens, the bank forecloses on your home

Edit2: Since this is blowing up, adding some more detail: The best move for lots of people was to stop paying their mortgages. American mortgages are surprisingly pro-buyer. If the bank forecloses on your home, then they sell it to cover the remaining balance on your loan. If they make more than you owe, you get the extra. If they make less, *the bank eats the loss* and you owe nothing. So if you owe more than your house is worth, trying to keep paying for as long as possible just means you’re spending your own money to lower the banks losses

Edit: yes everyone this is also incomplete. When i wrote this, basically everyone was explaining why the housing market collapsed and not how this led to people actually losing their homes, which is what OP asked about. And yes, all ELI5 answers must be incomplete by their nature

most people in America don’t fully own their home. they have to borrow money from a bank to buy it and the bank owns the house until they pay the loan back. everybody trusts banks because all these home loans get payed off for years so banks have guaranteed income and people almost always pay their loans properly. so if a bank lends out a million dollars, they can kind of act like they still have it, because they’ll get it back with interest over the next ~30 years.

Well it turns out they were lending money to people when they knew those people could never pay it back. They could still act like that’s guaranteed income and people would believe that they “basically” still had that money to spend so it let them act rich even though what they were holding was useless.

people lost their homes because all of a sudden everyone realized these were bad loans. banks ran out of money and the whole economy started hurting. The people who were never going to be able to pay their loans weren’t magically better equipped now that the economy was worse so they started missing loan payments. if you don’t pay your loans the bank kicks you out and takes “their” house back.

Others have talked about the big bank side of things, but as someone who went through it personally i will try to explain from the homeowners perspective.

We bought a house in a brand new subdivision being built in the middle of the Arizona desert in 2007 for $160,000. Our initial interest rate was somewhere around 3-4%, ridiculously low which made the mortgage ridiculously cheap. I was 21 and it was affordable for where I was at in my career and I expected my finances to grow when the mortgage rate eventually did too, or to refinance before that date came because it was an up and coming neighborhood being built up out of the desert and everyone speculated the property value would boom in a few years time. Short sighted, I know.

The only problem was that due to that bubble popping, by 2009 our property value fell to $130,000. We now owed more than our house was worth. Due to other economic issues at the time, my career growth hit a snag and by the time the interest rates went up in 2011 I was so upside down on the house and had no way to stop the bleeding.

e: fixed a word

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Multiple cascading problems.

Housing prices crashed, so a lot of people had houses that were suddenly worth much less than before. This means people had loans for like 300k but the property was worth 200k.

Some people had loans that actually didn’t pay off interest so they actually owed MORE each month then the last. These people were sold these loans because they could just buy the house and sell it 6 months later for but profit.

When the market crashed companies laid people off. A lot of families lost income. 1 of 2 working parents losing a job was enough to see the house get lost

And each of these problems fed into the other. People lost houses people lost money. With more money lost more houses lost.

The first big issue is that banks gave mortgages to people who were always going to have a very difficult time paying these mortgages back. These mortgages are called “subprime” mortgages.

At first, these mortgages had what are called “teaser rates”. Basically, for the first few years of the mortgage, interest rates were low, but afterwards the interest rate went up. Let’s say, 2% interest for the first 2 years, but 10% after that. Once these teaser rates ran out, subprime mortgages because much harder to pay, and many could not pay their mortgages any more.

Another issue was that house prices started to fall dramatically. So, let’s say you borrowed 300,000 to buy your house. But now the house is only worth 200,000. A lot of people thought paying 300,000 for a house only valued at 200,000 wasn’t worth it, and they simply handed back the house to the bank rather than pay their mortgage.

This was all the first stage, but what happened next was banks themselves started to get into trouble because so many mortgages were not being paid back, and some of the banks failed. This meant banks stopped lending money to other banks and to people in general. People no longer were able to borrow money, which resulted in a recession and many people lost their jobs. This resulted in even more people not being able to pay their mortgages and more people losing their homes.

TLDR: Banks lent money to people who would not be able to pay it back. This caused mortgages to default and banks themselves got in trouble, leading to a recession.

Watching the big short would probably be the best explanation/entertainment value for your time honestly.

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There were a few factors.

What kicked it all off was the Adjustable Rate Mortgages (ARMs) and loose loan requirements. They first drove housing prices way up, everyone could get a loan and buy their own McMansion. Developers were building everywhere they could. But then people started getting hit with the rate adjustments and balloon payments or just falling on hard times and started defaulting on mortgages. People got foreclosed on, and banks and developers lost a lot of money and started laying off workers.

Then we got a financial downward feedback loop. A lot of people lost their jobs, so they couldn’t pay the mortgage or be good little consumers. Normally you can sell the house or find a new job, but so many people lost their jobs that no one could buy the house and they were all competing for a new job. Businesses that weren’t even related to housing had to lay off workers because so many people were broke they couldn’t buy new cars or other consumer goods.

When housing prices actually go down it really causes problems, you can’t sell a house for $400k if you have a $500k loan on it. Anyone who bought a house in the 5-10 years had negative equity.
The banks also got screwed by this because they were foreclosing on houses and losing hundreds of thousands on each one.

The whole system was jacked to the tits in leverage, so all it took was a slight downturn for a lot of people to go broke.

Predatory lending. Banks were giving out loans to people with poor credit that they knew couldn’t pay the loans bank.

To make matters worse, they were giving these people “adjustable rate mortgage” loans, that were somewhat affordable to start, and then after a year or so the monthly mortgage payment would “adjust” to a much higher rate that the families couldn’t afford to pay.

The bank creates a loan, lies about your income, you move in, the mortgage jumps up (balloon payments, anyone?) and the bank forecloses on you, then resells the house while pocketing your mortgage payments.

Eventually this process collapsed, because all of the loans began failing at the same time.

It wasn’t just that housing prices dropped, because that would not have directly affected anyone with stable income that planned to continue living in their house for 10 more years.

The problem was that a lot of people also lost their jobs, which meant that they could not keep making their house payments. They also couldn’t just sell their house and downsize, because they now owed more than their house was worth.

As an example, I had a friend that bought a house in the early 2000’s for $175k. They put almost nothing down. Both he and his wife made good money at the same company, so they could afford the mortgage. A few years later they both got laid off. In a normal situation they would have sold that house for $180k – $200k and bought a smaller house. But the housing marked had dropped, and they were still building identical houses in that neighborhood and selling them for $140k. My friend owed $170k on his house, so they would have had to sell it and then owe the bank $30k. So, instead, they just walked away.

If they hadn’t lost their jobs, they would probably still live there today, the house would be halfway paid off, and it would be worth $250 – $350k today (because we are in another housing bubble right now).

I was one of those people. Here is my story. I bought a home in about 2003 or so. My wife and i did not qualify for a normal mortgage, because we did not make enough and did not have alot to put down. So we got a sub prime 80 20 loan with a 5 year balloon. Assuming we could refinance about 5 years later into a conventional loan. 5 years later our 180k house was worth less than 90k. We owed a 30k baloon payment. Could not get refinanced. Our house got forclosed because we could not sell.

Somebody who lost their house in 2009 here. Lending was down right predatory. I was making $28k/year, and they signed me for a no dock loan of $163k in 2007. I paid $3000 down. That was it. There was NO way I could actually afford that loan, but I was 23 and a complete idiot. To keep up the payment I was living off a credit card, and it didn’t take long for me to simply not be able to make any kind of payment. I did a strategic foreclosure, where I bought a new house at a depressed price ($60k) and walked away from my first place. if I had done it a few months later, they could have sued me for the lost of value, but I did it just in time to not be able to be sued. you couldn’t do that today. my life was hell for years because of that, but I am debt free except my current home where I owe only about 15% of it’s current value and should have it paid off in a few more years.

If you want to hear it explained in a clear and detailed way that is also entertaining, listen to this podcast: [https://www.thisamericanlife.org/355/the-giant-pool-of-money](https://www.thisamericanlife.org/355/the-giant-pool-of-money)

It was a vicious cycle fueled by greedy mortgage investors. I’ll try to break it down.
Housing prices were climbing at a crazy rate. (keep reading to understand why). In order for a “normal” person to afford the purchase of a house mortgage companies created inventive ways to justify creating mortgages for people that really couldn’t afford them. Negative amortization loans (you would get a loan with a negative interest rate for some amount of time, before it would switch back to a positive rate). Adjustable rate mortgages. Balloon loans. No income verification loans. These were all gimmicks that would allow someone–say a $10 hour clerk at a big box store to qualify for a loan that would otherwise be far out of reach for them. Normally its a bad idea to make a loan to someone who doesn’t have the ability to pay the loan back, but the lenders were willing to make these loans because housing prices were going up so fast, by the time the lender would need to foreclose on the property, it was probably worth 20-40% more that what was lent. So now you’ve increased the pool of people who can “afford” to buy a house–instead of 50% of the population being in a position to be able to buy a home, now 80% have that option. That created a huge swell in demand. The increase in demand drove prices higher. With housing prices going through the roof, ordinary people started speculating on home construction–Buy a home under construction. Then wait for the 6-9 months for the home to be built. Sell the house before you ever move in for a tidy profit. This extra demand drove housing prices higher. At one point, when new housing developments opened up, there were lotteries on who got to actually purchase the homes. So now you have a bunch of houses sold at artificially high price many under construction didn’t even have real people waiting to move in–they were just speculative investments. This worked as long as prices kept going up. Higher prices = relaxed mortgage qualifications = more demand = Higher prices… and so on…

Then the oil crunch of 2007 happened. Gas shot up to over $4/gallon and everyone pulled back on spending. People slowed down with the houses–basically reducing the demand. Reduced demand = lower prices. Now lenders started to pull back on those relaxed mortgage qualifications, this reduced demand even further. Reduced demand = lower prices. Now all those people who were speculating on those new construction loans are screwed. They paid for a house that is worth significantly less than what they paid. Reduced investment = lower prices. Now you are in a situation where people owe money on houses that are worth about half what they paid for them. Regardless if you had bought a house to actually live in, or if you just bought one as an investment you are faced with the choice of paying your mortgage effectively paying $500,000 for a house that you can sell for $250,000, or just walking away. Now look back at the $10 store clerk–The negative amortization loan has flipped back to positive and your $2,000/month payment is now going to be $3,500 and you don’t qualify for a loan to refinance. Even if you did–you wouldn’t be able to get your property to appraise for the amount you need to refinance. Your only option is to walk away.

My ex was a mortgage broker during this time and I basically had a front row seat to the disaster.

The ELI5 version:

“Hey, everyone’s buying houses. You want one?”

“I can’t afford to buy a house.”

“Sure you can. Here’s how much it’ll cost you.”

“That’s actually affordable. Cool. What’s the catch?”

“Oh, no catch, it’s just a low introductory rate. Don’t you want a house?”

(non-savvy people say ‘sign me up’).

Suspicious people: “Wait, what’s this 3/1 ARM thing mean?”

“Oh, it means that the amount you pay is based off of a market number you don’t really need to worry about. But it’s guaranteed for at least three years, and hey, look at these other distracting house numbers showing the price of houses will go up. Worst case scenario you can sell if you can’t afford it later.”

“What if I don’t want to sell?”

“Well, you can just refinance, since the value of your house is going to go up anyway. Why rent when you can buy?”

(easily distracted people sign up here)

“But I have bad credit. Are you sure this is going to work?

“I’ll take care of everything. Just sign here.”

(gullible people who don’t read fine print misstating the value of the buyer sign here)

Realtor goes to 49 other people who also sign. House demand goes up so prices go way up real quick as everyone tries to cash in. Some people go all in and buy multiple houses in order to flip them later, or get rental income.

Realtor, who is in it to make commissions off of home sales: “Hey, bank, I got 50 loan applications here (okay, 10 good, 10 reasonably good, and 30 ‘okay’), paperwork’s all filled out and signed. We good?

Banker, who got legislative oversight removed by the government, seeing that the bank makes money off of the interest and worst case, gets the house if they repossess: “We’re good.”

Banker: “Hey, we can’t actually afford to loan out 50x houses worth of cash and stay in business. Megabank, can I sell you these ‘Really Good 50’ house loan contracts?

Megabank, who has tons of money: “Sure. Here you go.”

Fast forward to 3-5 years later.

Interest rate on house goes up as the ARM expires. Suddenly 1250/month payments (1.5% ARM) become 2600/month payments and unaffordable. Everyone else who bought in on the land rush has the same problem, and they default on their loan payments. You might think, ‘why is that a problem?’

First, nobody will refinance when the value of your home hasn’t gone up by enough for you, and now that they see that you can’t make payments on the worth of your house at any rate other than the intro rate, you can’t get a better loan you can afford. You wind up stuck with the higher rate loan.

Imagine if you will that you’re trying to hang onto your house despite it costing more than you can afford. You live off of credit cards, but also? You stop doing home repairs. You try and bend the loss curve by converting your garage to a studio apartment without going through the city for permits (because those cost money). By the time you give up the fight, your house requires repairs -and- has some unsightly extra addons.

Meanwhile, the bank has repossessed a bunch of houses, which they can’t sell because they have so many. Foreclosed homes are hard to sell in a good market because the bank is trying to make money off of a dead investment, so only people who have lots of cash can get to them. And the bank has no money to renovate them (plus they’re not in the business of renovating houses anyway) so they fall into even worse condition.

People looking to buy houses drive into your neighborhood and see lots of houses all run down at the same time, think, ‘this is a bad neighborhood’ and don’t want to buy your house either. Even dropping the asking price isn’t helping.

Worse, the people who bought multiple houses are super screwed because they can’t offload any of their houses and the government bailouts only count on primary residence.

The more people lose their houses, the more the bank can’t make its money back from all the people defaulting on their loans… because all the people who bought at the same time mean that the value of a house keeps going down because nobody can or will buy these inflated value houses.

And this goes all the way up to the megabank level, where suddenly their guaranteed income that they were borrowing money from other people off the strength of their assets (aka people guaranteed to pay money) goes away.

So to sum up:

Realtors tricked people into buying houses they couldn’t afford. Banks tricked other banks into giving them money based on the houses people bought from them. And when all the people who bought houses suddenly lost them in 2008, all that paper worth vanished.

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Source: me, and my decade plus long experience trying to buy a house. I still have the old brochures with the 3/1 arm circa 2003 and the presentation from a predatory lender claiming I could afford a house when I had almost no money in the bank. She punched numbers into her spreadsheet and it always said buying was better than renting, but I crunched the numbers myself and realized the trap before I signed anything.

Watch ‘the big short’. Is an interesting movie that explains the sub-prime mortgages and why it went to shit.

I actually re watched it a couple nights ago.

Also completely changed appraisal process. Appraisers could be convinced to appraise a home at needed price not market value. So you have a home worth on the market for 250k but got a loan for 400k which puts u 150k of lost value. Eventually that caught up to people along with the rest of the economy crashing. So you have a high loan amount which in turn is a high mtg and then let’s say you lost your job or money became tight…best you could do is sell the home at market value which is 250k. So your on the hook (rather the country and lender as well which compounded is billions or trillions in lost money) which caused lenders to collapse. It was shitty. Next crash won’t be as bad because appraisers are now chosen randomly and highly reviewed. Right now a home may sell higher than market value but u won’t get a loan for that full amount. It was the Wild West I’ll tell you. I was a loan officer for a period of time and I was calling people who were so fucked and didn’t know it. And you know that ass that bought that 500k home he couldn’t afford also had that car he couldn’t afford. The car bill or credit card falls behind and you can’t get a refi to use equity from the home to help you debt. At that point the creditors come and eventually your late on that mtg and next thing you know a smart
Money person bought ur 250k home for 100k from the bank 2 years after it sat there. Be smart!!!!!! A home at market value (remember will always fluctuate, is a great investment and savings account if you do it properly)