The Housing Market Crash of 2008 was caused by fraud, greed, and unethical decisions. The crash didn't banks and investors. It also hurt communities and families all over the world. It affected every homeowner and renter in America. The structure of the housing market in the early 2000s was inherently unsound. It was built for investors. One of the problems was that the CDO's (CDO'sages bundled basically) kept getting sold. To the investor investing in these CDOs was safe. The investors thought If the resident defaulted, the investor would sell the property at a higher cost. The housing market was secure, or at least the investors thought that.
Let's dive into why the housing market crashed in the first place. In the early 2000s, the housing market was skyrocketing. It was the safest thing to invest in, in the beginning. Investors saw that if they purchased mortgages, they would get some good money from the interest rating. So investors bought Mortage-Backed-Securities. These Mortage-Backed-Securities were mortgages bundled together by banks and sold to investors. The demand for the Mortgage-Backed-Security was increasing. So to meet the demand, lenders tried their best to provide more Mortage-Backed-Securities. The only problem was they needed more people with mortgages to build these. So the lenders started handing out subprime mortgages, which are mortgages that don't require good credit. All it requires is a steady income. Lenders began offering these subprime mortgages with adjustable mortgage rates, meaning that the monthly payment would get to insanely high monthly payments to anyone who applied. The lenders figured out that if they sold mortgages, they would get paid, and then they would sell the mortgage to a bank, then the bank would bundle it, then get it rated as a AAA CDO, then sold to The investors. The mortgage was passed up the ladder. Lender, Banks, and the Credit rating agency never held the risk.
The credit agency rated these CDOs full of bad mortgages, as AAA CDOs, AAA being the best of the best mortgages. These CDOs weren't stable at all. People started not paying mortgages because they couldn't afford them. Then people began selling their houses at the price of their mortgage. Although this wasn't working, the cost of homes plummeted because supply was high, and demand started to fall. When people stopped paying their mortgages, the CDOs began to fail. These CDOs started to attract attention from investors, and they decided to short the CDOs. They placed mass amounts of money on these CDOs, so they would pay out big if they ever failed. That was a great idea, although when the housing market crashed on December 30, 2008, the banks didn't have enough money to pay the investors who shorted the CDOs. Banks started to close, houses got foreclosed, and people were thrown on the street.
The cause of the housing market crash was greed. Banks wanted money, so they sold bad CDOs. Credit agencies didn't want to lose business, so they did what the banks wanted and rated anything and everything AAA. Lenders sold mortgages to anyone, even knowing that they wouldn't be able to pay it. Everyone was making money until it all came crumbling down. Banks didn't ultimately suffer, the government gave bailouts to the banks, and the economy eventually recovered.
References:
"How it Happened - The 2008 Financial Crisis: Crash Course Economics #12". CrashCourse, (2015) Retrieved at How it Happened - The 2008 Financial Crisis: Crash Course Economics #12 - YouTube
Carol M. Kopp, (2021). Subprime Mortgages. Investopedia. Retrieved at: Subprime Mortgage Definition (investopedia.com)
The Secondary Mortage Market Before and After The Housing Crisis. Retrieved at: Secondary Mortgage Market Before & After Housing Crisis | Northeastern