We have often heard it said, “Something too good to be true probably is.” And so it applies to the way loans were issued in the years leading up to the subprime lending crisis. Political forces identified a need for low-income home-ownership and impressed on capital institutions the importance of more engagement with a high-risk market. Some simply blame the loan crisis on banks and greed. “The greater the profitable opportunities, the greater the coercive force. Ethics be damned” (Watkins, 2011, pp. 365).
In the aftermath of the US financial crisis of 2007-2009 an “estimated $8 trillion of wealth in the US stock market was lost on top of the $6 trillion loss in the market value of homes. The total wealth loss of $14 trillion by US households in 2009 was equal to the entire 2008 US GDP” (Liu, 2013, para. 1).
When the banks first revealed that they had taken on at least $2 trillion of toxic assets that were beyond their capacity to withstand financially, the government stepped in.
“The unraveling of the U.S. economy began with the collapse of the subprime market. The subprime lending market provided a relatively new, untapped source of potential profits” (Watkins, 2011, p. 366).
“Although subprime mortgages accounted for less than 20 percent of all mortgages outstanding, just over half of these foreclosure initiations were on subprimes” (Gilbert 2011 p. 88). Naturally a review of the subprime lending meltdown would lead to the source of the risky banking behaviors and the government housing policies that created the loan availability.