What Caused the 2008 Financial Collapse?

This article was written by Phineas Upham

Though the housing market is showing signs of recovery today, the 2008 crises dealt a significant blow to US backed mortgages. The resulting collapse of several mortgage banks led to an over $700 billion bailout package arranged by the federal government. How American banks got there is a lesson in financial planning.

There were many causes of the mortgage crises, the biggest being a vast increase in subprime mortgages. Historically, subprime mortgages have never peaked above 8%. In two years, that number spiked to almost 20%, and 90% of those mortgages were adjustable rates. This meant that borrowers were facing ballooning payments on rates that would change at a specified date.

Coupled with the extreme debt faced by many US households, lending was at risk of default. Prices for homes also rose, which caused many loans to go upside down. When the adjustable rates kicked in, buyers found themselves in a difficult situation. They could not refinance to a more acceptable rate, nor could they afford the higher house payment.

The crisis also had repercussions outside of the US, where foreign lenders lost money on the debts they bought up. This led to worldwide concerns that the US would default on its loans, and the country lost its triple A credit rating.

In total, the housing market lost nearly 30% of its value by 2009. Roughly 6% of the American work force was jobless, and the stock market had lost almost 50% of its value. Today, the markets are rebounding but the climb back up is slow to come.

About the Author: Phineas Upham is an investor at a family office/hedgefund, where he focuses on special situation illiquid investing. Before this position, Phineas Upham was working at Morgan Stanley in the Media & Technology group. You may contact Phineas on his Twitter page.