: what was the subprime mortgage crisis ?
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In an effort to encourage more people to buy homes, politicians passed feel good legislation that loosened lending requirements. This allowed people who previously couldn’t qualify for a home loan to be able to get a mortgage and buy a home. The loans were considered sub prime because they were given to people with less than prime credit scores and income. When the economy had a down turn many of those sub prime lenders were no longer keep up with their payments.
Of course politicians always blame others for their mistakes so they started blaming the mortgage companies (banks) The problem with their complaints is that the same politicians decoupled the mortgage process from the mortgage companies. So you had. And still have mortgage brokers creating the loans. Then many mortgages are bundled and sold to a lender like a big bank.
So suddenly when the economy went sour these banks, especially smaller banks were saddled with unrecoverable debt and many started to go bankrupt. When a FDIC insured bank goes bankrupt, the federal government is required to step in and repay the customers. As you can guess, it would be very expensive for the tax payer if a bunch of banks went bankrupt. So one solution, rather than spend huge sums of money on failing banks, some big banks large sums of money to buy the toxic mortgages from the smaller banks. By allowing smaller banks to off-load their bad loans, it kept them from going bankrupt and saved the federal government lots of money. The big banks, because they have more assets were able to administer the mortgages without going bankrupt.
Of course the same politicians who reduced lending requirements, decoupled mortgage brokers from the actual lenders and blamed then blamed the problem on mortgage companies and lenders then attacked the solution as a bail out for big banks.
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