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His subject areas include philosophy, law, social science, politics, political theory, and religion. **Fact-checked by**The Editors of Encyclopaedia Britannica [The Editors of Encyclopaedia Britannica](https://www.britannica.com/money/author/The-Editors-of-Encyclopaedia-Britannica/4419) Encyclopaedia Britannica's editors oversee subject areas in which they have extensive knowledge, whether from years of experience gained by working on that content or via study for an advanced degree. They write new content and verify and edit content received from contributors. Article History Read More [ depression](https://www.britannica.com/money/depression-economics) [ recession](https://www.britannica.com/money/recession) [ financial crisis of 2007–08](https://www.britannica.com/money/financial-crisis-of-2007-2008) Table Of Contents Date: December 2007 - June 2009 Location: [United States](https://www.britannica.com/place/United-States) Context: [mortgage](https://www.britannica.com/money/mortgage) [subprime mortgage](https://www.britannica.com/money/subprime-mortgage) [financial crisis of 2007–08](https://www.britannica.com/money/financial-crisis-of-2007-2008) [austerity](https://www.britannica.com/money/austerity) [subprime lending](https://www.britannica.com/money/subprime-lending) **Great Recession**, economic [recession](https://www.britannica.com/money/recession) that was precipitated in the [United States](https://www.britannica.com/place/United-States) by the [financial crisis of 2007–08](https://www.britannica.com/money/financial-crisis-of-2007-2008) and quickly spread to other countries. Beginning in late 2007 and lasting until mid-2009, it was the longest and deepest economic downturn in many countries, including the United States, since the [Great Depression](https://www.britannica.com/event/Great-Depression) (1929–*c.* 1939). The financial crisis, a severe contraction of [liquidity](https://www.britannica.com/money/liquidity) in global financial markets, began in 2007 as a result of the bursting of the U.S. housing bubble. From 2001 successive decreases in the prime rate (the [interest rate](https://www.britannica.com/money/interest-rates) that banks charge their “prime,” or low-risk, customers) had enabled banks to issue [mortgage](https://www.britannica.com/money/mortgage) loans at lower interest rates to millions of customers who normally would not have qualified for them (*see* [subprime mortgage](https://www.britannica.com/money/subprime-mortgage); [subprime lending](https://www.britannica.com/money/subprime-lending)), and the ensuing purchases greatly increased demand for new housing, pushing home prices ever higher. When interest rates finally began to climb in 2005, demand for housing, even among well-qualified borrowers, declined, causing home prices to fall. Partly because of the higher interest rates, most subprime borrowers, the great majority of whom held [adjustable-rate mortgages](https://www.britannica.com/topic/adjustable-rate-mortgage) (ARMs), could no longer afford their loan payments. Nor could they save themselves, as they formerly could, by borrowing against the increased value of their homes or by selling their homes at a profit. (Indeed, many borrowers, both prime and subprime, found themselves “underwater,” meaning that they owed more on their mortgage loans than their homes were worth.) As the number of foreclosures increased, banks ceased lending to subprime customers, which further reduced demand and prices. As the subprime mortgage market collapsed, many banks found themselves in serious trouble, because a significant portion of their assets had taken the form of subprime loans or bonds created from subprime loans together with less-risky forms of consumer debt (*see* [mortgage-backed security](https://www.britannica.com/money/mortgage-backed-security); MBS). In part because the underlying subprime loans in any given MBS were difficult to track, even for the institution that owned them, banks began to doubt each other’s solvency, leading to an interbank credit freeze, which impaired the ability of any bank to extend credit even to financially healthy customers, including businesses. Accordingly, businesses were forced to reduce their expenses and investments, leading to widespread job losses, which predictably reduced demand for their products, because many of their former customers were now unemployed or underemployed. As the portfolios of even prestigious banks and investment firms were revealed to be largely fictional, based on nearly worthless (“toxic”) assets, many such institutions applied for government bailouts, sought mergers with healthier firms, or declared [bankruptcy](https://www.britannica.com/money/bankruptcy). Other major businesses whose products were generally sold with consumer loans suffered significant losses. The car companies [General Motors](https://www.britannica.com/money/General-Motors-Corporation) and [Chrysler](https://www.britannica.com/money/Chrysler), for example, declared bankruptcy in 2009 and were forced to accept partial government ownership through bailout programs. During all of this, [consumer confidence](https://www.britannica.com/money/consumer-confidence) in the economy was understandably reduced, leading most Americans to curtail their spending in anticipation of harder times ahead, a trend that dealt another blow to business health. All these factors combined to produce and prolong a deep recession in the United States. From the beginning of the recession in December 2007 to its official end in June 2009, real [gross domestic product](https://www.britannica.com/money/gross-domestic-product) (GDP)—i.e., GDP as adjusted for [inflation](https://www.britannica.com/money/inflation-economics) or [deflation](https://www.britannica.com/science/deflation-geomorphology)—declined by 4.3 percent, and [unemployment](https://www.britannica.com/money/unemployment) increased from 5 percent to 9.5 percent, peaking at 10 percent in October 2009. [Britannica Quiz Economics News](https://www.britannica.com/quiz/economics-news) *[(Read Lee Iacocca’s Britannica entry on Chrysler.)](https://www.britannica.com/money/Chrysler)* As millions of people lost their homes, jobs, and savings, the [poverty](https://www.britannica.com/topic/poverty) rate in the United States increased, from 12.5 percent in 2007 to more than 15 percent in 2010. In the opinion of some experts, a greater increase in poverty was averted only by federal legislation, the 2009 [American Recovery and Reinvestment Act](https://www.britannica.com/topic/American-Recovery-and-Reinvestment-Act) (ARRA), which provided funds to create and preserve jobs and to extend or expand [unemployment insurance](https://www.britannica.com/money/unemployment-insurance) and other safety net programs, including food stamps. Notwithstanding those measures, during 2007–10 poverty among both children and young adults (those aged 18–24) reached about 22 percent, representing increases of 4 percent and 4.7 percent, respectively. Much wealth was lost as U.S. stock prices—represented by the [S\&P 500](https://www.britannica.com/money/SandP-500) index—fell by 57 percent between 2007 and 2009 (by 2013 the S\&P had recovered that loss, and it soon greatly exceeded its 2007 peak). Altogether, between late 2007 and early 2009, American households lost an estimated \$16 trillion in net worth; one quarter of households lost at least 75 percent of their net worth, and more than half lost at least 25 percent. Households headed by younger adults, particularly by persons born in the 1980s, lost the most wealth, measured as a percentage of what had been accumulated by earlier generations in similar age groups. They also took the longest time to recover, and some of them still had not recovered even 10 years after the end of the recession. In 2010 the wealth of the median household headed by a person born in the 1980s was nearly 25 percent below what earlier generations of the same age group had accumulated; the shortfall increased to 41 percent in 2013 and remained at more than 34 percent as late as 2016. Those setbacks led some economists to speak of a “lost generation” of young persons who, because of the Great Recession, would remain poorer than earlier generations for the rest of their lives. Losses of wealth and speed of recovery also varied considerably by socioeconomic class prior to the downturn, with the wealthiest groups suffering the least (in percentage terms) and recovering the soonest. For such reasons, it is generally agreed that the Great Recession worsened inequality of wealth in the United States, which had already been significant. According to one study, during the first two years after the official end of the recession, from 2009 to 2011, the aggregate net worth of the richest 7 percent of households increased by 28 percent while that of the lower 93 percent declined by 4 percent. The richest 7 percent thus increased their share of the nation’s total wealth from 56 percent to 63 percent. Another study found that between 2010 and 2013 the aggregate net worth of the richest 1 percent of Americans increased by 7.8 percent, representing an increase of 1.4 percent in their share of the nation’s total wealth (from 33.9 percent to 35.3 percent). As the financial crisis spread from the United States to other countries, particularly in western [Europe](https://www.britannica.com/place/Europe) (where several major banks had invested heavily in American MBSs), so too did the recession. Most industrialized countries experienced economic slowdowns of varying severity (notable exceptions were [China](https://www.britannica.com/place/China), [India](https://www.britannica.com/place/India), and Indonesia), and many responded with stimulus packages similar to the ARRA. In some countries the recession had serious political repercussions. In [Iceland](https://www.britannica.com/place/Iceland), which was particularly hard-hit by the financial crisis and suffered a severe recession, the government collapsed, and the country’s three largest banks were nationalized. In [Latvia](https://www.britannica.com/place/Latvia), which, along with the other Baltic countries, was also affected by the financial crisis, the country’s GDP shrank by more than 25 percent in 2008–09, and unemployment reached 22 percent during the same period. Meanwhile, [Spain](https://www.britannica.com/place/Spain), [Greece](https://www.britannica.com/place/Greece), [Ireland](https://www.britannica.com/place/Ireland), [Italy](https://www.britannica.com/place/Italy), and [Portugal](https://www.britannica.com/place/Portugal) suffered sovereign debt crises that required intervention by the [European Union](https://www.britannica.com/topic/European-Union), the [European Central Bank](https://www.britannica.com/money/European-Central-Bank), and the [International Monetary Fund](https://www.britannica.com/topic/International-Monetary-Fund) (IMF) and resulted in the imposition of painful [austerity measures](https://www.britannica.com/money/austerity). In all the countries affected by the Great Recession, recovery was slow and uneven, and the broader social consequences of the downturn—including, in the United States, lower [fertility rates](https://www.britannica.com/topic/fertility-rate), historically high levels of student debt, and diminished job prospects among young adults—were expected to linger for many years. [Brian Duignan](https://www.britannica.com/money/author/brian-duignan/6469) Read More [ financial crisis of 2007–08](https://www.britannica.com/money/financial-crisis-of-2007-2008) [ mortgage](https://www.britannica.com/money/mortgage) [ subprime lending](https://www.britannica.com/money/subprime-lending) Table Of Contents [Finance & the Economy](https://www.britannica.com/money/browse/history-and-theory) [Finance Basics](https://www.britannica.com/money/browse/Finance-Basics) # subprime mortgage Print Cite Share Links **Written by**Peter Bondarenko [Peter Bondarenko](https://www.britannica.com/money/author/Peter-Bondarenko/9343972) Former Assistant Editor, Economics, Encyclopædia Britannica. **Fact-checked by**The Editors of Encyclopaedia Britannica [The Editors of Encyclopaedia Britannica](https://www.britannica.com/money/author/The-Editors-of-Encyclopaedia-Britannica/4419) Encyclopaedia Britannica's editors oversee subject areas in which they have extensive knowledge, whether from years of experience gained by working on that content or via study for an advanced degree. They write new content and verify and edit content received from contributors. Article History Read More [ financial crisis of 2007–08](https://www.britannica.com/money/financial-crisis-of-2007-2008) [ mortgage](https://www.britannica.com/money/mortgage) [ subprime lending](https://www.britannica.com/money/subprime-lending) Table Of Contents  Open full sized image Contunico © ZDF Studios GmbH, Mainz; Thumbnail © Weerayos Surareangchai/Dreamstime.com **subprime mortgage**, a type of home loan extended to individuals with poor, incomplete, or nonexistent [credit](https://www.britannica.com/money/credit) histories. Because the borrowers in that case present a higher [risk](https://www.britannica.com/money/risk-finance) for lenders, subprime [mortgages](https://www.britannica.com/money/mortgage) typically charge higher [interest](https://www.britannica.com/money/interest-economics) rates than standard (prime) mortgages. The most common type of subprime mortgage contract offered in the [United States](https://www.britannica.com/place/United-States) is the [adjustable rate mortgage](https://www.britannica.com/topic/adjustable-rate-mortgage) (ARM), which charges a fixed [interest rate](https://www.britannica.com/money/interest-rates) for an initial period and a floating interest rate thereafter. The floating rate may be based on an index such as the [federal funds rate](https://www.britannica.com/money/federal-funds-rate), which is the rate at which [banks](https://www.britannica.com/money/bank) lend money to each other overnight. The sharp increase in [subprime lending](https://www.britannica.com/money/subprime-lending) that occurred in the United States beginning in the late 1990s was primarily fueled by subprime mortgages. According to the [Federal Reserve](https://www.britannica.com/money/Federal-Reserve-System), the share of subprime mortgages among all home loans in the country increased from about 2.5 percent per year in the late 1990s to about 15 percent per year in 2004–07. One reason for the increase was aggressive marketing by mortgage brokers, who were paid commissions on the basis of the quantity, not the quality, of the loan contracts they sold. The overuse of subprime mortgages and their widespread [securitization](https://www.britannica.com/money/securitization) was one of the primary factors that triggered the [financial crisis of 2007–08](https://www.britannica.com/money/financial-crisis-of-2007-2008) and the subsequent [Great Recession](https://www.britannica.com/money/great-recession) (2007–09) after the demand for housing reached a saturation point in the United States in late 2007. As house prices plateaued, many subprime borrowers found themselves with houses they could not sell and with mortgages they could no longer afford. As they began to [default](https://www.britannica.com/money/default) on their loans and nationwide [foreclosure](https://www.britannica.com/money/foreclosure) rates hit record highs, banks and other lending institutions became less willing to lend to risky borrowers. As a result, subprime mortgages lost the wide popularity that they had once enjoyed among lenders in the United States. 0 seconds of 3 minutes, 30 secondsVolume 90% Press shift question mark to access a list of keyboard shortcuts Keyboard Shortcuts EnabledDisabled Shortcuts Open/Close/ or ? 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Contunico © ZDF Studios GmbH, Mainz; Thumbnail © Weerayos Surareangchai/Dreamstime.com [Peter Bondarenko](https://www.britannica.com/money/author/Peter-Bondarenko/9343972) [](https://www.britannica.com/money) [About Us](https://www.britannica.com/money/about)[Privacy Policy](https://corporate.britannica.com/privacy-policy-2)[Terms & Conditions](https://corporate.britannica.com/termsofuse.html) © 2026 Encyclopædia Britannica, Inc.

Date: December 2007 - June 2009 **Great Recession**, economic [recession](https://www.britannica.com/money/recession) that was precipitated in the [United States](https://www.britannica.com/place/United-States) by the [financial crisis of 2007–08](https://www.britannica.com/money/financial-crisis-of-2007-2008) and quickly spread to other countries. Beginning in late 2007 and lasting until mid-2009, it was the longest and deepest economic downturn in many countries, including the United States, since the [Great Depression](https://www.britannica.com/event/Great-Depression) (1929–*c.* 1939). The financial crisis, a severe contraction of [liquidity](https://www.britannica.com/money/liquidity) in global financial markets, began in 2007 as a result of the bursting of the U.S. housing bubble. From 2001 successive decreases in the prime rate (the [interest rate](https://www.britannica.com/money/interest-rates) that banks charge their “prime,” or low-risk, customers) had enabled banks to issue [mortgage](https://www.britannica.com/money/mortgage) loans at lower interest rates to millions of customers who normally would not have qualified for them (*see* [subprime mortgage](https://www.britannica.com/money/subprime-mortgage); [subprime lending](https://www.britannica.com/money/subprime-lending)), and the ensuing purchases greatly increased demand for new housing, pushing home prices ever higher. When interest rates finally began to climb in 2005, demand for housing, even among well-qualified borrowers, declined, causing home prices to fall. Partly because of the higher interest rates, most subprime borrowers, the great majority of whom held [adjustable-rate mortgages](https://www.britannica.com/topic/adjustable-rate-mortgage) (ARMs), could no longer afford their loan payments. Nor could they save themselves, as they formerly could, by borrowing against the increased value of their homes or by selling their homes at a profit. (Indeed, many borrowers, both prime and subprime, found themselves “underwater,” meaning that they owed more on their mortgage loans than their homes were worth.) As the number of foreclosures increased, banks ceased lending to subprime customers, which further reduced demand and prices. As the subprime mortgage market collapsed, many banks found themselves in serious trouble, because a significant portion of their assets had taken the form of subprime loans or bonds created from subprime loans together with less-risky forms of consumer debt (*see* [mortgage-backed security](https://www.britannica.com/money/mortgage-backed-security); MBS). In part because the underlying subprime loans in any given MBS were difficult to track, even for the institution that owned them, banks began to doubt each other’s solvency, leading to an interbank credit freeze, which impaired the ability of any bank to extend credit even to financially healthy customers, including businesses. Accordingly, businesses were forced to reduce their expenses and investments, leading to widespread job losses, which predictably reduced demand for their products, because many of their former customers were now unemployed or underemployed. As the portfolios of even prestigious banks and investment firms were revealed to be largely fictional, based on nearly worthless (“toxic”) assets, many such institutions applied for government bailouts, sought mergers with healthier firms, or declared [bankruptcy](https://www.britannica.com/money/bankruptcy). Other major businesses whose products were generally sold with consumer loans suffered significant losses. The car companies [General Motors](https://www.britannica.com/money/General-Motors-Corporation) and [Chrysler](https://www.britannica.com/money/Chrysler), for example, declared bankruptcy in 2009 and were forced to accept partial government ownership through bailout programs. During all of this, [consumer confidence](https://www.britannica.com/money/consumer-confidence) in the economy was understandably reduced, leading most Americans to curtail their spending in anticipation of harder times ahead, a trend that dealt another blow to business health. All these factors combined to produce and prolong a deep recession in the United States. From the beginning of the recession in December 2007 to its official end in June 2009, real [gross domestic product](https://www.britannica.com/money/gross-domestic-product) (GDP)—i.e., GDP as adjusted for [inflation](https://www.britannica.com/money/inflation-economics) or [deflation](https://www.britannica.com/science/deflation-geomorphology)—declined by 4.3 percent, and [unemployment](https://www.britannica.com/money/unemployment) increased from 5 percent to 9.5 percent, peaking at 10 percent in October 2009. [Britannica Quiz Economics News](https://www.britannica.com/quiz/economics-news) *[(Read Lee Iacocca’s Britannica entry on Chrysler.)](https://www.britannica.com/money/Chrysler)* As millions of people lost their homes, jobs, and savings, the [poverty](https://www.britannica.com/topic/poverty) rate in the United States increased, from 12.5 percent in 2007 to more than 15 percent in 2010. In the opinion of some experts, a greater increase in poverty was averted only by federal legislation, the 2009 [American Recovery and Reinvestment Act](https://www.britannica.com/topic/American-Recovery-and-Reinvestment-Act) (ARRA), which provided funds to create and preserve jobs and to extend or expand [unemployment insurance](https://www.britannica.com/money/unemployment-insurance) and other safety net programs, including food stamps. Notwithstanding those measures, during 2007–10 poverty among both children and young adults (those aged 18–24) reached about 22 percent, representing increases of 4 percent and 4.7 percent, respectively. Much wealth was lost as U.S. stock prices—represented by the [S\&P 500](https://www.britannica.com/money/SandP-500) index—fell by 57 percent between 2007 and 2009 (by 2013 the S\&P had recovered that loss, and it soon greatly exceeded its 2007 peak). Altogether, between late 2007 and early 2009, American households lost an estimated \$16 trillion in net worth; one quarter of households lost at least 75 percent of their net worth, and more than half lost at least 25 percent. Households headed by younger adults, particularly by persons born in the 1980s, lost the most wealth, measured as a percentage of what had been accumulated by earlier generations in similar age groups. They also took the longest time to recover, and some of them still had not recovered even 10 years after the end of the recession. In 2010 the wealth of the median household headed by a person born in the 1980s was nearly 25 percent below what earlier generations of the same age group had accumulated; the shortfall increased to 41 percent in 2013 and remained at more than 34 percent as late as 2016. Those setbacks led some economists to speak of a “lost generation” of young persons who, because of the Great Recession, would remain poorer than earlier generations for the rest of their lives. Losses of wealth and speed of recovery also varied considerably by socioeconomic class prior to the downturn, with the wealthiest groups suffering the least (in percentage terms) and recovering the soonest. For such reasons, it is generally agreed that the Great Recession worsened inequality of wealth in the United States, which had already been significant. According to one study, during the first two years after the official end of the recession, from 2009 to 2011, the aggregate net worth of the richest 7 percent of households increased by 28 percent while that of the lower 93 percent declined by 4 percent. The richest 7 percent thus increased their share of the nation’s total wealth from 56 percent to 63 percent. Another study found that between 2010 and 2013 the aggregate net worth of the richest 1 percent of Americans increased by 7.8 percent, representing an increase of 1.4 percent in their share of the nation’s total wealth (from 33.9 percent to 35.3 percent). As the financial crisis spread from the United States to other countries, particularly in western [Europe](https://www.britannica.com/place/Europe) (where several major banks had invested heavily in American MBSs), so too did the recession. Most industrialized countries experienced economic slowdowns of varying severity (notable exceptions were [China](https://www.britannica.com/place/China), [India](https://www.britannica.com/place/India), and Indonesia), and many responded with stimulus packages similar to the ARRA. In some countries the recession had serious political repercussions. In [Iceland](https://www.britannica.com/place/Iceland), which was particularly hard-hit by the financial crisis and suffered a severe recession, the government collapsed, and the country’s three largest banks were nationalized. In [Latvia](https://www.britannica.com/place/Latvia), which, along with the other Baltic countries, was also affected by the financial crisis, the country’s GDP shrank by more than 25 percent in 2008–09, and unemployment reached 22 percent during the same period. Meanwhile, [Spain](https://www.britannica.com/place/Spain), [Greece](https://www.britannica.com/place/Greece), [Ireland](https://www.britannica.com/place/Ireland), [Italy](https://www.britannica.com/place/Italy), and [Portugal](https://www.britannica.com/place/Portugal) suffered sovereign debt crises that required intervention by the [European Union](https://www.britannica.com/topic/European-Union), the [European Central Bank](https://www.britannica.com/money/European-Central-Bank), and the [International Monetary Fund](https://www.britannica.com/topic/International-Monetary-Fund) (IMF) and resulted in the imposition of painful [austerity measures](https://www.britannica.com/money/austerity). In all the countries affected by the Great Recession, recovery was slow and uneven, and the broader social consequences of the downturn—including, in the United States, lower [fertility rates](https://www.britannica.com/topic/fertility-rate), historically high levels of student debt, and diminished job prospects among young adults—were expected to linger for many years. [Brian Duignan](https://www.britannica.com/money/author/brian-duignan/6469)