Easy housing credit resulted in the higher demand for homes. In fact, the loan verification process was so lax at the time that it drew its own nickname: NINJA loans, which stands for "no income, no job, and no assets."īecause subprime mortgages were granted to people who previously couldn't qualify for conventional mortgages, it opened the market to a flood of new homebuyers. A prospective subprime borrower might have multiple dings on their credit history or dubious streams of income. These risky loans, called subprime mortgages, would later become one of the main causes of the Great Recession.Ī subprime mortgage is a type of loan issued to borrowers with low credit ratings. To capitalize on the boom, mortgage lenders rushed to approve as many home loans as they could, including to borrowers with less-than-deal credit. In the decade leading up to 2007, real estate and property values had been rising steadily, encouraging people to invest in property and buy homes.īy early to mid-2000s, the residential housing market was booming. Loose lending standards in the housing market While just one contributing factor to the Great Recession, the changes to the Glass-Steagall Act brought a period of national expansion for corporations and the gobbling up of small, independent institutions, which created entities that were "too big to fail" - or so everyone thought. Repealing key provisions of the Glass-Steagall Act allowed banks and brokerages to become significantly larger, and opened the floodgates for giant mergers. This made traditionally risky behavior - like aggressive investment and leveraging strategies, plus taking on excessive debt - seem safe.Īssumptions about economic growth also contributed to a period of deregulation, most significantly the 1999 rollback of the Glass-Steagall Act, a landmark Depression-era legislation that separated commercial and investment banking. Everyone from homeowners to bankers believed the economy would keep growing. However, unbridled optimism led to immoderate spending, especially for risk-loving investors. The name refers to the contemporary belief that the traditional boom-and-bust business cycle had been overcome in favor of middling but stable economic growth. This period - from the mid-1980s up to 2007 - was optimistically called the Great Moderation. The two decades before the Great Recession were largely prosperous, with rises in GDP, low inflation, and two relatively mild recessions.
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