John’s Story , Second Part: 2008 Mortgage Crisis

Hello friends,

I hope you’ve all been doing well since our last chat.Today, we’re moving on to the second part of John’s story and continue exploring what happened next. As you may remember, in the first part (you can find it here), we talked about our friend who worked at Ford, his investments, and how he was affected by the shockwaves of the Dot-Com crash. Actually, John wasn’t hit too hard since he didn’t hold much stock. After the crash, he believed it was wiser to avoid investing for a while—at least in companies or stocks surrounded by uncertainty.

Of course, John wasn’t the only one who thought this way. Many people were trying to save their money rather than pouring it into new investments. On top of that, John decided not to sell his Amazon.com shares, even though he had panicked and sold off his other holdings. The problem was, the Amazon shares he had once bought with three months’ worth of salary were now worth less than a single month’s pay. Naturally, that made him feel poorer, and like millions of others, he cut back on his spending.

To make matters worse, the 9/11 attacks happened while the economy was still shaky, pushing things downhill. John felt himself sinking even deeper into uncertainty and insecurity. During this period, the Federal Reserve was slashing interest rates, which by early 2002 had fallen all the way to 1%. Still, even with these measures, John wasn’t convinced to jump back into investing just yet.

Time went by, and soon it was 2003. The crisis seemed to be fading a little, but people remained more cautious about taking risks. Around then, some of John’s friends were talking about how, with such low interest rates, getting a mortgage made sense—they’d end up paying less back to the banks. John didn’t own a home yet, so he paused for a moment and thought, “Maybe I should buy one too.” But remembering the mistakes he had made in the late ’90s, he decided to research carefully, checking the risks and credit ratings before making any moves.

When he looked into it, he saw that credit rating agencies like Moody’s and S&P had given these investments AAA ratings—practically risk-free. That sounded convincing. With the savings he had built up over the past 2–3 years, he could finally make a move. After all, housing prices had been climbing since 2003–2004, and with interest rates so low, even if he couldn’t pay off the mortgage, he could just sell the house at a higher price. He even had some cash for a down payment. So one day, he left work early and stopped by a bank.

At the bank, he spoke with the loan officer about getting a mortgage. With a stable job, a strong credit score, and a clean financial record, he was confident he’d qualify for the loan he wanted. But when the banker offered him far more money than he had expected—or could realistically afford—John was shocked. After thinking it over, he decided not to take out the loan and left the bank. He wondered, “How could they lend money so easily?” and realized he needed to rethink the whole mortgage idea.

Interest Rates set by Federal Reserve (1998-2010)

In the meantime, John learned that banks were bundling these loans together and selling them to other companies and investors as “mortgage-backed securities,” often at lower interest rates than what they collected from borrowers. By doing this, banks could quickly raise cash, while investors saw these securities as solid, safe investments. Their logic was simple: “Even if the borrower defaults, I’ll get the house—and prices are high anyway, so I’ll make a profit.”

Banks, eager to keep this cycle going and meet their liquidity needs, started offering mortgages even to people who clearly couldn’t afford them—these became known as “subprime mortgages.” But soon, subprime borrowers began defaulting. Investors repossessed the houses and tried to sell them. Yet the flood of homes on the market, combined with fewer buyers, caused prices to collapse( *The relationship between supply and demand).

Imagine buying a $500,000 home only to see its value drop to $200,000 just two months later. That’s what happened to many people, and some simply stopped paying their loans altogether. Banks were left holding thousands of unsold homes, forced to sell them cheaply, taking massive losses. Besides, firms like Lehman Brothers, which had been heavily involved in selling mortgage-backed securities, couldn’t meet their liquidity needs and saw their bonds collapse in value—leading to their complete bankruptcy. (It remains one of the biggest bankruptcies in U.S. history.)

As the crisis unfolded, John did his best to avoid getting hit. In fact, once housing prices had dropped, he managed to buy a home with his savings, without needing a loan, and ended up profiting :)

2008 Mortgage Crisis (Defined by Google Gemini)

As you know, the 2008 financial crisis is considered one of the defining events of the 2000s. It was sparked by a combination of factors: the Dot-Com crash in the late ’90s that undermined public confidence, the 9/11 attacks that deepened uncertainty, and the Federal Reserve’s aggressive rate cuts that pushed people toward “safer” investments like real estate. But reckless behavior by banks and weak regulations turned what looked like a stable market into a chain reaction of collapse.

I hope this gave you a clear picture. We will see what the future will bring, as there will definitely be new crises, but we are not sure what type of them we are going to see or to what extent.

See you next time!