Artificial Boom in the Real Estate Market

Second-class real estate loans, so-called subprime mortgages, triggered the misery. The reason is different: Many Americans had lived beyond their means for years. Some took out several mortgages on their property. Mortgage backed securities based on subprime loans bring higher returns, but are also more risky than normal mortgage backed securities.

In the Clinton era, the government had already attempted to promote home ownership. Every US citizen would be able to afford his or her own home. But the banks' mortgage practices at the time stood in the way of realizing this plan. As a result of pressure from Washington, the mortgage banks Fannie Mae and Freddie Mac abandoned their rigid lending policies in the early 1990s, offering mortgage contracts with only 3% down payments and ultimately some without any security requirements at all.

The banks outdid themselves in granting so-called Ninja credits (no income, no job or assets) to people without jobs, income or assets. The result was an artificial boom and a steep increase in prices on the real estate market. At the same time, other US banks drastically expanded their credit volumes. For this purpose, subprime mortgages were mixed with other papers and distributed worldwide. As a result of this questionable practice, mortgage certificates circulated in huge quantities, their value vastly exceeding the value of the available real estate. "Some banks did not pass on the risks; they were confident of eternally rising real estate prices," says Singer.

When the economic data worsened, however, and interest rates rose, many people could no longer pay their mortgages. The bubble burst, demand for real estate sank, prices fell-foreclosures were the logical consequence.