Subprime Meltdown

Subprime Meltdown

What Does Subprime Meltdown Mean?

A term that refers to the 2008 financial crisis that arose out of the subprime mortgage market collapse brought on by borrowers who defaulted on their loans in record numbers. This led to the collapse of many mortgage lenders, banks, and hedge funds. The meltdown spilled over into the global credit market as risk premiums increased rapidly and capital liquidity was reduced. The sharp increase in foreclosures and the problems in the subprime mortgage market were blamed largely on loose lending practices, low interest rates, a housing bubble, and excessive risk taking by lenders and investors. It is also known as the subprime collapse or the subprime crisis.

Investopedia explains Subprime Meltdown

After the tech bubble and the events of September 11, 2001, the Federal Reserve stimulated a struggling economy by cutting interest rates to historically low levels. As a result, a housing bull market arose. Everyone was buying a home, even people with poor credit, and mortgage lenders created nontraditional mortgages: interestonly loans, payment-option ARMs, and mortgages with extended amortization periods. Eventually, interest rates rose, resetting adjustable rate mortgages at higher levels, which led to a record number of homeowners defaulting on their loans. That left mortgage lenders holding properties that were declining in value; more loan defaults occurred until eventually lenders started going out of business and the credit markets froze. Investors and hedge funds also suffered because lenders sold securitized mortgages in the secondary market in the form of collateralized debt obligations (CDOs) and other mortgage-backed securities (MBSs). When the underlying mortgages began to default, those MBSs became nearly worthless.

Related Terms:
• Collateralized Mortgage Obligation—CMO
• Credit Crunch
• Liar Loan
• Securitization
• Subprime Loan