In 1999, the Federal National Mortgage Association (FNMA or Fannie Mae) wanted to make home loans more accessible to those with low credit ratings and less money to spend on down payments than lenders typically required. These subprime borrowers, as they were called, were offered mortgages with payment terms, such as high interest rates and variable payment schedules, that reflected their elevated risk profiles.
This increased availability of mortgage debt appealed to both previously ineligible borrowers and investors, fueling explosive growth in mortgage originations and home sales. At the same time, consumers, many of them new homeowners, took on additional debt to buy other goods. Companies seeking to capitalize on the opportunities afforded by the surging economy also heavily indebted themselves. Financial institutions, similarly, used cheap debt to boost the returns on their investments.
This debt-fueled stock market started to show signs of impending collapse in March, 2007, when the investment bank Bear Stearns could not cover its losses linked to subprime mortgages. Bear Stearns’ failure was not enough by itself to cause the stock market to crash — it kept rising, to 14,164 points on Oct. 9, 2007 — but by September of 2008, the major stock indexes had lost nearly 20% of their value. The Dow didn’t reach its lowest point, which was 54% below its peak, until March 6, 2009. It then took four years for the Dow to fully recover from the crash.