“Our ongoing financial turmoil began in the mortgage market. Real-estate loans at commercial banks grew at a remarkable 12.26 percent compound annual rate over the four-year period from the midpoint of 2003 to the midpoint of 2007.[1] The expanded volume of mortgages—notably including an unusually large share of mortgages with “nonprime” ratings—fueled a run-up in condo and house prices to unprecedented heights, followed by a sharp decline. (Was this a “bubble” in prices? Yes, in the sense that the price path was unsustainable; no, in the sense that it was not entirely self-feeding.) Default rates on nonprime mortgages and adjustable-rate mortgages rose to unexpected highs, reducing cash flows to lenders. Financial firms holding securitized mortgage bundles (aka “mortgage-backed securities”) saw the expectation of continuing reductions in cash flows reflected in declining market values for their securities. Uncertainty about future cash flows impaired the liquidity (re-salability) of their securities.” Read more.

“What Really Happened”
Cato Unbound
Lawrence H. White