How It Ended
Mortgage lenders, desperate to meet the demand investment banks had for home loans, began radically relaxing their standards, writing more and more loans for shaky homebuyers.
Investment banks, desperate to keep pace with the market demand for MBSs, were more than ready to overlook this fact, especially when rating agencies continued rubber-stamping their products as AAA, investment-grade securities based on the assumption that housing prices would continue rising.
That’s usually a safe assumption. But, in this case, the housing bubble gave way to the housing crisis and home prices started to decline. It soon became clear that most of the MBSs that sold like hot cakes only a few years earlier were, in fact, virtually worthless.
The collapse of the housing market precipitated a crash in stocks, a bailout of the banking industry and the Great Recession.