Changes

In the early 2000s, U.S. interest rates were low and demand for housing was high, as housing prices soared, especially in California, Florida, Nevada and Arizona. Mortgage companies and banks were very eager to lend at low rates, especially to people with mediocre credit who would not previously have been eligible for mortgages.  The expectation was that rising house prices would cover the mortgage payments through refinancing. In addition, hundreds of billions of dollars poured into the U.S. from abroad, and financiers looked for imaginative ways to make a profit. They turned to real estate.

In the early 2000s, U.S. interest rates were low and demand for housing was high, as housing prices soared, especially in California, Florida, Nevada and Arizona. Mortgage companies and banks were very eager to lend at low rates, especially to people with mediocre credit who would not previously have been eligible for mortgages.  The expectation was that rising house prices would cover the mortgage payments through refinancing. In addition, hundreds of billions of dollars poured into the U.S. from abroad, and financiers looked for imaginative ways to make a profit. They turned to real estate.

Americans owed some $10 trillion on their mortgages, most of which were sound with payments made on time. However financiers bundled the mortgages into very complicated packages called "'''collateralized debt obligations''''<ref> That is, homeowners were obligated to pay the debts and the collateral behind them was the physical house.</ref> or CDOs. Hundreds of billions of dollars worth of CDO's were sold to banks, pension funds and financiers in the U.S. and Europe. Generally they borrowed cash to buy the CDOs.  The risk was that if the CDO's declines in value, they would not be able to repay those loans.  To minimize the risk, companies sold insurance called "credit default swaps" ('''CDS''') to guarantee payment of the CDOs. The largest seller was American International Group ('''AIG'''), the world's largest insurance company. The CDOs and CDS were especially attractive because they were not regulated by the government; experts are not sure him many trillions of dollars are involved.

Americans owed some $10 trillion on their mortgages, most of which were sound with payments made on time. However financiers bundled the mortgages into very complicated packages called "'''collateralized debt obligations''''<ref> That is, homeowners were obligated to pay the debts and the collateral behind them was the physical house.</ref> or CDOs. Hundreds of billions of dollars worth of CDO's were sold to banks, pension funds and financiers in the U.S. and Europe. Generally they borrowed cash to buy the CDOs.  The risk was that if the CDO's declines in value, they would not be able to repay those loans.  To minimize the risk, companies sold insurance called "credit default swaps" ('''CDS''') to guarantee payment of the CDOs. The largest seller was American International Group ('''AIG'''), the world's largest insurance company. The CDOs and CDS were especially attractive because they were not regulated by the government; experts are not sure how many trillions of dollars are involved.

Many mortgages were held by mortgage companies like Countrywide and  Washington Mutual, as well as investment banks such as Bear Stearns, Merrill Lynch, Lehman Brothers, and Goldman Sachs.  

Many mortgages were held by mortgage companies like Countrywide and  Washington Mutual, as well as investment banks such as Bear Stearns, Merrill Lynch, Lehman Brothers, and Goldman Sachs.  

==Bubble bursts==

==Bubble bursts==

The housing "bubble" burst in 2006-07, as prices plunges downward in the Sunbelt, and many people could not meet their payments, especially those who had "sub-prime" mortgages, where the monthly payments started small then escalated. With housing prices falling few people risked buying a new house (because it would soon be worth less than they paid for it). Construction firms had built millions of new houses that could not be sold. Meanwhile foreclosures skyrocketed especially on the loans to people with poor credit.

The housing "bubble" burst in 2006-07, as prices plunged downward in the Sunbelt. Many homeowners could not meet their payments, especially those who had "sub-prime" mortgages because their income was low, or who had adjustable rate mortgages where the monthly payments started small then escalated.  Foreclosures skyrocketed. With housing prices falling few people risked buying a new house (because it would soon be worth less than they paid for it). Construction firms had built millions of new houses that could not be sold but which glitted the market.

The problem was that no one could figure out what CDOs were now worth, so very few were willing to buy them.  One major investment bank, Merrill Lynch, sold its CDOs for 22 cents on the dollar--a "fire sale" price that was less than they were worth in the long run, because in the long run the great majority of people would make their scheduled mortgage payments.  

The problem was that no one could figure out what CDOs were now worth, so very few were willing to buy them.  One major investment bank, Merrill Lynch, sold its CDOs for 22 cents on the dollar--a "fire sale" price that was less than they were worth in the long run, because in the long run the great majority of people will make their scheduled mortgage payments.  

==2008 crises==

==2008 crises==

Multiple crises started pulling down major financial players.  Countrywide. the largest mortgage lender, collapsed and was bought up by Bank of America.  Bear Stearns, a large investment bank, went under; the government arranged a sale to JPMorgan Chase; stock holders lost about 90% of their investment, and the confidence in other banks was undermined.

Multiple crises started pulling down major financial players.  Countrywide, which originated 20% of all American mortgages in 2006, collapsed and was bought up by Bank of America in July 2008.  Bear Stearns, a large investment bank, went under; the government arranged a sale to JPMorgan Chase; stock holders lost about 90% of their investment, and the confidence in other banks was undermined.

On September 7, 2008, the government took control of the two largest mortgage holders, "Fannie Mae"<ref> Federal National Mortgage Association (FNMA)</ref> and "Freddy Mac"<ref>Federal Home Loan Mortgage Corporation (FHLMC) </ref>. The two had lost $15 billion ON THE $5.4 trillion in mortgages they owned, and their notes were widely held in China and many other countries.  The fear was that if the Treasury did not act the world's confidence in the US financial system would collapse.  However the rest of the world was in trouble too.  The stock markets in China and Russia plunged 50%, and the British Treasury had to take over its largest mortgage company, Northern Rock.  Vast sums of money flowed into the US because it was safer there than anywhere else.

On September 7, 2008, the government took control of the two largest mortgage holders, "Fannie Mae"<ref> Federal National Mortgage Association (FNMA)</ref> and "Freddy Mac"<ref>Federal Home Loan Mortgage Corporation (FHLMC) </ref>. The two had lost $15 billion on the $5.4 trillion in mortgages they owned, and their notes were widely held in China and many other countries.  The fear was that if the Treasury did not act the world's confidence in the US financial system would collapse.  However the rest of the world was in trouble too.  The stock markets in China and Russia plunged 50%, and the British Treasury had to take over its largest mortgage company, Northern Rock.  Vast sums of money flowed into the US because it was safer there than anywhere else.

By September the major banks were no longer lending money and most reported huge losses as they wrote down the value of the CDOs and other assets. Short sellers sold large amounts of stock in threatened companies, causing further panic and driving down share prices.<ref> The short sellers did not own the shares; the practice was stopped on Sept. 19, 2008, by the Securities and Exchange Commission because it destabilized markets.</ref> Lehman Brothers, one of the oldest and largest banks in New York, went bankrupt on Sept. 15 with no one to rescue it.  Merrill Lynch was sold to Bank of America for %50 billion, about half its value a few months before. Investors realized that AIG could no longer honor the insurance policies it wrote. It lost $13 billion in the first half of 2008 and its shares fell 95% in value. AIG was "too big" to be allowed to fail, so it was given an $85 billion loan from the government; in return the government received 80% of its stock.<ref> The Federal Reserve Bank of New York, part of the Federal Reserve System, handled the AIG case.</ref> In effect AIG, along with Fanny Mae and Freddy Mac were nationalized.  The Federal Reserve, with $800 billion in assets, was assisted by the Treasury, which gave it more funds.

By September the major banks were no longer lending money and most reported huge losses as they wrote down the value of the CDOs and other assets. Short sellers sold large amounts of stock in threatened companies, causing further panic and driving down share prices.<ref> The short sellers did not own the shares; the practice was stopped on Sept. 19, 2008, by the Securities and Exchange Commission because it destabilized markets.</ref> Lehman Brothers, one of the oldest and largest banks in New York, went bankrupt on Sept. 15 with no one to rescue it.  Merrill Lynch was sold to Bank of America for %50 billion, about half its value a few months before. Investors realized that AIG could no longer honor the insurance policies it wrote. It lost $13 billion in the first half of 2008 and its shares fell 95% in value. AIG was "too big" to be allowed to fail, so it was given an $85 billion loan from the government; in return the government received 80% of its stock.<ref> The Federal Reserve Bank of New York, part of the Federal Reserve System, handled the AIG case.</ref> In effect AIG, along with Fanny Mae and Freddy Mac were nationalized.  The Federal Reserve, with $800 billion in assets, was assisted by the Treasury, which gave it more funds.