What caused the last market collapse?

Few of us were untouched by the last market collapse that hit the United States in late 2008, reverberating out to the rest of the world, but what actually caused it?

In the late 90s and early 2000s, the U.S. housing market was hot. Prices were going up, and people were making more money so they could afford to buy.

However, by the mid-2000s, the cost of a home was out of reach for many buyers.

Still, some lenders in the U.S. didn’t want to sacrifice the business so they started offering what the industry refers to as NINJA (no income, no job or assets) loans.

“There was this greedy, very shortsighted trend that was unfolding,” says Craig Machel, vice president, portfolio manager with Richardson GMP. “Mortgage companies were lending to individuals who shouldn’t have had a mortgage.”

It all came crashing down when U.S. investment banks packaged these low-credit-quality mortgages and offered them to investors. “People were of the assumption that they were going to make some money,” he adds.

That never happened and the bubble popped. The result: investors lost money, lenders went out of business and many homes were foreclosed.

While most Canadians who felt the effects of the collapse had little or nothing to do with its cause, the one takeaway here may be that if a deal seems too good to be true, it probably is.