The subprime mortgage crisis is an ongoing financial crisis characterized by contracted liquidity in global credit markets and banking systems in the the United States.
A downturn in the housing market of the U.S., risky practices in lending and borrowing, and excessive individual and corporate debt levels have caused multiple adverse effects on the world economy.
The subprime crisis, which has roots in the closing years of the 20th century but became more apparent throughout 2007 and 2008, has passed through various stages exposing pervasive weaknesses in the global financial system and regulatory framework.
The crisis began with the bursting of the United States housing bubble and high default rates on "subprime" and adjustable rate mortgages (ARM), beginning in approximately 2005–2006.
For a number of years prior to that, declining lending standards, an increase in loan incentives such as easy initial terms, and a long-term trend of rising housing prices had encouraged borrowers to assume difficult mortgages in the belief they would be able to quickly refinance at more favorable terms.
However, once interest rates began to rise and housing prices started to drop moderately in 2006–2007 in many parts of the U.S., refinancing became more difficult. Defaults and foreclosure activity increased dramatically as easy initial terms expired, home prices failed to go up as anticipated, and ARM interest rates reset higher.
Foreclosures accelerated in the United States in late 2006 and triggered a global financial crisis through 2007 and 2008. During 2007, nearly 1.3 million U.S. housing properties were subject to foreclosure activity, up 79 percent from 2006. Major banks and other financial institutions around the world have reported losses of approximately 435 billion U.S. dollars as of July 17, 2008.
(Agencies October 15, 2008)