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09/07/2019

how did the financial crisis start?

QUESTION
how did the financial crisis start?
please help me out. i am writing a essay explaining how the financial crisis start and how it affect our everyday lives.

all i know is some banks made some really bad decisions on how they use the money(and something about a plan..?), so people buying houses were spending wayyy less money than they should have( !?!?!) and eventually lead them to some debt they couldnt get rid of…

i have no idea what it’s about, so can someone give me a full explanation (not in a sentense or two) about our financial crisis right now. also i dont like to read big words, so everyday-speech would help me very much. please and thanks

ANSWER
The big problem in our financial crisis is something called a “mortgage backed security”.
Traditionally, mortgages were held by banks, pension funds, insurance companies and the like. Some financial genius had the idea of going around buying up these mortgages and putting them all together in one pile. Then they started to sell parts of the pile to other investors as mortgage backed securities. The idea was that each investor owned a little bit of thousands of mortgages rather than a large investment in one property.
These securities became very popular because they offered a nice rate of return and were sold by some as an absolutely secure investment.
As these securities become more popular the companies that put the mortgages together needed more and more mortgages, so they encouraged the lenders to let anyone buy a house. This led to a lot of people buying houses that couldn’t afford them. When these people stopped paying their mortgages in large numbers the reliability of the securities came into question and the crisis started.