The 2007-2008 financial crisis or, the global financial crisis (GFC), was the most severe worldwide

economic crisis since the Great Depression. In the 2000s investors in The US and abroad looking for a low-
risk, high-return investment started investing their money in the housing market. The thinking was they

could get a better return from the interest rate homeowners paid on mortgages, than they could by
investing in things like Treasury Bonds, which were paying quite a low interest. But big money global
investors didn’t want to just buy up mortgages of individuals. Instead, they bought investments called
mortgage-backed securities. Mortgage-backed securities are created when large financial institutions
securitize mortgages. They buy up thousands of individual mortgages, bundle them together, and sell
shares of that pool to investors. Investors invested large amounts of money into these mortgage-backed
securities. Again, they paid a higher rate of return than investors could get in other places and they looked
like really safe investments. For one, home prices were going up and up. So, lenders thought, worst-case
scenario, if the borrower is unable to pay back the mortgage, we can just sell the house for more money.
At the same, credit rating agencies were telling investors these mortgage-backed securities were safe
investments. They gave a lot of these mortgage-backed securities AAA ratings. - The best of the best.
Investors were desperate to buy more of these securities. So, lenders did their best to help create more of
them. But to create more of them, they needed more mortgages. So, lender lowered their standards and
made loans to people with low income and poor credit these are called subprime mortgages. Eventually,
some institutions even started using what is called predatory lending practices they made loans without
verifying income and offered absurd, adjustable-rate mortgages with payments people could afford at
first, but quickly exceeded their paying capacity but these practices were brand new that meant credit
rating agencies could still point to historical data that indicated mortgage debt was a safe bet. However,
these investments were becoming less safe over time but investors trusted the ratings and kept investing
their money. While the investors were investing more and more money into the US housing market the
price of homes was rising. So, even if the borrowers are unable to pay back their mortgage the lenders
would still have the valuable house, right? Well, no, and for that we have to discuss the concept of the
housing bubble. A bubble means rapid price increases driven by irrational decisions. Well, this was a
bubble and the result was that people just could not pay for their expensive houses or mortgages.
Therefore, more houses were on the market for sale due to the owners not being able to keep up with the
mortgages. But there were no buyers so supply was up but demand was low which led to a decrease in
the prices of the house. As this was happening big financial institutions stopped buying sub-prime
mortgages and subprime lenders were getting stuck with bad loans. By 2007, some really bad lenders
were facing bankruptcy. It was among the five worst financial crises the world had experienced
and led to a loss of more than $2 Trillion from the global economy.