: what was the subprime mortgage crisis ?
In: 4
Banks lent money to people who couldn’t afford to pay it back. Many of these borrowers had bad credit scores, unstable jobs, and lots of other debt. They were classified as “sub-prime” borrowers.
Then they would sell the mortgages to investors in big batches. so now the mortgage payments are going to the investors, instead of the original lender. these investments are called “mortgage backed securities” or “Collateralized Debt Obligation (CDO).
Some of those investors were major banks and huge investment firms.
But that’s risky, so some big investors got insurance, just in case the homeowners defaulted on their loans. This insurance was called “credit default swaps”. But the thing is, *anyone* could buy a credit default swap, even if they weren’t the owner of the investment. So some people just bought them as investments, rather than insurance, hoping to make money when the CDO’s crashed.
And they did crash. big time. and the investors who owned the CDO’s lost a lot of money. And the companies who insured those CDO’s couldn’t pay for those losses, and they also lost a lot of money.
Latest Answers