Subprime Meltdown


DEFINITION of 'Subprime Meltdown'

The sharp increase in high-risk mortgages that went into default beginning in 2007, contributing to the most severe recession in decades. The housing boom of the mid-2000s – combined with low interest rates at the time – prompted many lenders to offer home loans to individuals with poor credit. When the real estate bubble burst, many borrowers were unable to make payments on their subprime mortgages.

BREAKING DOWN 'Subprime Meltdown'

Following the tech bubble and the economic trauma that followed the terrorist attacks on the U.S. on September 11, 2001, the Federal Reserve stimulated the struggling U.S. economy by cutting interest rates to historically low levels. As a result, the housing market soared for several years. In order to capitalize on the home-buying frenzy, some lenders extended mortgages to those who couldn’t qualify for traditional loans because of a weak credit history or other factors. Investment firms were eager to buy these loans and repackage them as mortgage-backed securities (MBSs).

Many subprime mortgages were adjustable-rate loans that were initially affordable, but which reset to a dramatically higher interest rate after a given period of time. This sudden spike in payments played a major role in the growing number of defaults, starting in 2007 and peaking in 2009. The ensuing meltdown caused dozens of banks to go bankrupt, and led to enormous losses from Wall Street firms and hedge funds that marketed or invested heavily in risky mortgage-related securities. The fallout was a major contributor to the global recession that followed.

In the wake of the subprime meltdown, myriad sources have received blame. These include mortgage brokers and investment firms that offered loans to people traditionally seen as high-risk, as well as credit agencies that proved overly optimistic about non-traditional loans. Critics also targeted mortgage giants Fannie Mae and Freddie Mac, which encouraged loose lending standards by buying or guaranteeing hundreds of billions of risky loans.

  1. Collateralized Debt Obligation ...

    An investment-grade security backed by a pool of bonds, loans ...
  2. Shadow Banking System

    The financial intermediaries involved in facilitating the creation ...
  3. Subprime Mortgage

    A type of mortgage that is normally made out to borrowers with ...
  4. Subprime

    A classification of borrowers with a tarnished or limited credit ...
  5. Default

    1. The failure to promptly pay interest or principal when due. ...
  6. Adjustable-Rate Mortgage - ARM

    A type of mortgage in which the interest rate paid on the outstanding ...
Related Articles
  1. Insurance

    Top 6 U.S. Government Financial Bailouts

    U.S. bailouts date all the way back to 1792. Learn how the biggest ones affected the economy.
  2. Insurance

    Dissecting The Bear Stearns Hedge Fund Collapse

    Learn how a deadly mix of greed and leverage cost investors millions.
  3. Home & Auto

    The Pitfalls Of Buying A Foreclosure House

    Find out if the house you're eyeing is really a good deal.
  4. Investing Basics

    Subprime Lending: Helping Hand Or Underhanded?

    These loans can spell disaster for borrowers, but that doesn't mean they should be condemned.
  5. Mutual Funds & ETFs

    Who Is To Blame For The Subprime Crisis?

    From lenders to buyers to hedge funds, it appears everyone has blood on their hands.
  6. Options & Futures

    Dialing In On The Credit Crisis

    Would a similar crisis have occurred if iPhone investors were offered the same loan options as homeowners?
  7. Insurance

    A Nightmare On Wall Street

    These tales of banking terror sent shivers down the spines of even the most steadfast bankers.
  8. Options & Futures

    Subprime Is Often Subpar

    Proceed with caution when considering these short-term, high-interest mortgages.
  9. Entrepreneurship

    The Rise And Demise Of New Century Financial

    A case study in how poor planning toppled a subprime mortgage giant.
  10. Personal Finance

    The Fuel That Fed The Subprime Meltdown

    Take a look at the factors that caused this market to flare up and burn out.
  1. Are subprime mortgages still available for homeowners?

    Subprime mortgages are usually the culprit that gets blamed for the housing bubble burst in the 2000s. After the housing ... Read Full Answer >>
  2. What are some of the arguments for and against a Value Added Tax (VAT)?

    A value-added tax (VAT) is a type of consumption tax placed on a product whenever value is added at a stage of production ... Read Full Answer >>
  3. If my mortgage lender goes bankrupt, do I still have to pay my mortgage?

    Yes, if your mortgage lender goes bankrupt you do still need to pay your mortgage obligation. Sorry to disappoint, but there ... Read Full Answer >>
  4. What is a subprime mortgage?

    A subprime mortgage is a type of loan granted to individuals with poor credit histories (often below 600), who, as a result ... Read Full Answer >>
  5. Do FHA loans have prepayment penalties?

    Unlike subprime mortgages issued by some conventional commercial lenders, Federal Housing Administration (FHA) loans do not ... Read Full Answer >>
  6. Can FHA loans be refinanced?

    Federal Housing Administration (FHA) loans can be refinanced in several ways. According to the U.S. Department of Housing ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  2. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  3. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  4. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  5. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  6. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
Trading Center