Explain what subprime mortgages are and how they contributed to the 2008 financial crisis.
Answer (1)
Subprime mortgages caused a chain reaction.Risky loans → loan defaults → falling house prices → investors lost money → banks collapsed → global recession. This teaches us the importance of responsible lending, strong regulations, and understanding financial risks before investing.Subprime mortgages are loans given to people who have poor credit histories or low incomes. These people are considered "high-risk" because there is a higher chance that they might not be able to pay back the loan. Normally, banks avoid giving loans to such borrowers. But in the early 2000s in the United States, banks started to approve more subprime loans because they wanted to earn more profit.These loans had higher interest rates, which made them more expensive over time. Many of the people who got these loans could only pay for a short time. Eventually, they couldn’t continue paying, and they defaulted, meaning they failed to repay their mortgages. When this happened, banks had to take back the houses, but the value of those houses had already dropped.At the same time, these subprime loans were turned into investment products called Collateralized Debt Obligations (CDOs) and sold to investors. The problem was, the investors didn’t realize how risky the loans were. When many homeowners started to default, the CDOs lost their value. Banks and investment companies who had bought or sold these products lost a lot of money.The crisis didn’t just stay in the United States. Because many countries were connected through global trade and finance, the effects spread around the world. In the Philippines, although we didn’t experience the same kind of housing crisis, our exports dropped, and many overseas Filipino workers (OFWs) faced problems because companies abroad were also affected.
