The Mortgage Crisis, also called the Housing Crisis, or the Sub-Prime Mortgage Crisis, was the worst event to happen to the United States economy since the Great Depression.  Depending on whom you ask, you will hear a number of ideas about exactly who should take the blame for causing it.  What happened?  Here is a simplified version about what went on in the Mortgage Crisis.

In the past, banks would make mortgage loans.  These loans were kept on their own books.  This gave the banks good incentive to make certain that the loan had all the appropriate paperwork filled out, that things were verified, and that the person taking the loan would be able to pay it back.  If the person defaulted, or did not pay back the loan, the bank would be out that amount of money.  This made getting a loan difficult for a person who did not have much income.

Then, the rules changed.  Now, banks were making mortgage loans, and then selling those loans to investors.  The bank got all its money back in this transaction.  If the person defaulted on the loan now, it would be the investor who would lose money instead of the bank.  As a result, banks were not being as careful about whom they gave loans to. In some cases, paperwork was slightly altered so more people could be given a loan, even if it did not seem like they would be able to pay it back.  Investors relied on companies to tell them if a loan was good or bad before they bought it, but separating the good from the bad was becoming increasingly unclear.

At the same time, the cost of housing fell.  People who had a mortgage refinanced it, often at a higher interest rate than what the original mortgage had.  This was done to release the equity on their home so they could get extra money.  Other people took loans that were much higher than they could realistically pay off, in order to buy a house that they would “flip”. To “flip” a house means to buy it, fix it up, and resell if for a higher price in a very short time.

When this “bubble” burst, it started a chain reaction.  People defaulted on their mortgages.  Investors lost money.  Banks became unable to sell bad mortgages to investors.  The money stopped flowing.  The mortgage crisis began.