The US Housing Bubble and Subprime Lending

From the late 1990s to 2006, US home prices rose by more than 80 percent nationally, fueled by low interest rates, relaxed lending standards and the belief that house prices would keep rising. Lenders increasingly made 'subprime' mortgages to borrowers with weak credit, often with low initial 'teaser' rates that later reset higher. Most of these loans were not held by the original lender but were bundled into mortgage-backed securities and more complex products such as collateralized debt obligations, then sold to investors worldwide.

Credit rating agencies gave many of these securities top ratings, while foreign demand for safe-seeming dollar assets supplied plenty of funding. Because lenders could sell loans quickly, incentives to check borrowers' ability to repay weakened. When prices began falling in 2006 and rates reset, defaults surged. Losses spread to banks and investors in many countries, and in August 2007 French bank BNP Paribas froze three funds, a moment often seen as the start of the global crisis.