What Started the 2008 Financial Crisis?

The financial crisis that our economy has experienced over the last years began when the economy started to slow down and many of the large banks and financial institutions found themselves exposed to a huge amount of sub-prime loans that were about to go under. 

Sub-prime loans were a way for banks to advertise the idea of buying a house to lower income families who would not have been able to afford a permanent residence without this new opportunity. Banks lent money to these families, who may or may not have had a history of bad credit so that they could buy a house with a small down payment and a low interest rate in the first few years. As a result families who bad credit scores and already in debt and sought after by medical collections or other debt collections agencies were given loans.

As housing prices started to drop in many regions of the country, all of a sudden many banks found themselves holding mortgages on homes that are worth far less than the value of the mortgage. At the same time, the homeowner did not want to continue making payments on a house that is worth less than what they owe for it. So many homeowners, real estate investors, and speculators decided to stop paying their mortgages and decided to turn the property over to the lending bank.

The bank in most cases did not want the house back because they had no opportunity to resell the house. Each mortgage default incident created a chain reaction. Once other sub-prime homeowners hear about what happened, they too recognized the financial incentive to walk away from their house as well.  All of a sudden, the banks were faced with a shortfall of assets to liability ratio on their books. The banks now had all these real estate assets that were dropping in value and they had no money coming in to counter balance.

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