I didn't write this, but it's a pretty good record of what happened. Its ridiculous to blame the crisis on CRA or ACORN or whatever. The central thesis seems to be that the government forced lenders to give loans to risky customers, when in fact lenders chose to give loans to risky customers because there was a vast amount of profit to be made. (Reasonable people can differ on whether the CRA is good policy in principle and in practice, but thats really besides the point here.) It works like this: 1) The global economy was pretty good, so theres loads of extra money sloshing around that people want to invest in something nice and safe. (It actually doubled from $36 trillion to $72 trillion between 2001 and 2007.) 2) At the same time, house prices were going up. 3) So, people decide to invest in mortgages. 4) Obviously there are lots of steps from, say, an investor in Mumbai to a homeowner in Michigan, but lets concentrate on Wall St banks with lots of money and smaller mortgage lenders operating in communities. (Not that small necessarily, Countrywide was one, for instance.) 5) Mortgage lenders sell mortgages to wannabe homeowners. Then they sell them up the chain to Big Banks (and the investors they represent) who get the rights to the income and associated risk. 6) As things continue going nicely, Big Banks are happy to get their hands on more and more mortgages. But lenders are almost running out of people to sell houses to. 7) Fine, say the banks, who have plenty more investors who want to get in on the action. Give mortgages to more people, even those youd usually turn down. 8 ) The lenders have a field day. Usually to get a mortgage you have to prove what money you have and what your income is. No longer! Now you can just tell the lender what you earn. Sometime later, the rules are even looser and the banks dont even ask. (The fabled NINA, No Income No Assets loan.) And to entice people in they start giving away mortgages with very low introductory rates and all kinds of exciting offers (the fabled predatory lending practices) to get more and more people to sign up. Dont forget, housing prices are still going up so lots of people are figuring they can sell the house on before the higher interest kicks in. 9) Meanwhile the banks are buying these rather dodgy mortgages by the bucketload. They mix the good and bad ones up together, whatever, who cares. Credit rating agencies reckon its alright, though, and give them all AAA ratings. This is partly because even if a homeowner defaults, the owners of the mortgage deal get to repossess the house and sell it at a profit. Also, who pays the credit rating agency to rate stuff? The bank with the stuff to be rated. 10) Housing bubble bursts, because thats what bubbles do. 11) Homeowners hoping to flip their property before the higher interest rates kick in cant sell it for what they paid for it. Theyre screwed, and default. Dumber people who just magically hoped they could pay the higher interest rates coming down the line? They cant, and default. People who didnt read the small print in their mortgage, also screwed, and default. 12) Banks start to notice all the foreclosures. They refuse to buy the dodgiest mortgages from lenders, which is bad news for lenders as theyve just borrowed loads of money and given out some bad mortgages and now they cant sell them up the chain. Some lenders, therefore, go bust. 13) Obviously the fall in house prices means that the banks cant cover their debts by selling off the property. Anyway, everyone starts to cotton on to the fact that bad stuff is going on. Investors start selling their share in the mortgages to wash their hands of them, and the price of them starts going down, so what the banks actually own in terms of capital is less and less and less. 14) Credit rating agencies start downgrading all these dodgy mixed up mortgages. And then the rest is all Wall Street insider stuff. Banks and investment funds start writing-off assets, basically admitting that all these investments they have are worthless. Share prices go down so they cant make as much money by potentially issuing more shares. Banks dont know what dodgy-ass mortgages each other have and dont want to loan each other money. But loaning each other money is what makes the whole system work, so institutions start falling over because they cant operate without access to the loans. For instance, Lehman Brothers ended up stuck with the crappiest mortgages (possibly because they were potentially the most profitable, possibly because they couldnt find investors for them) and ended up losing $3 billion. Washington Mutual gave out subprime mortgages directly, and lost $8 billion. Merril Lynch lost $19.2 billion in a year. IndyMac was one of the biggest lenders and had $10.7bn of mortgages ready to sell up the chain, but suddenly nobody want to buy them, and they had to eat the losses when large numbers of them went into foreclosure. Countrywide had to eat losses, then their share price went down so they couldnt raise money by issuing new shares, and then they had to admit that they were essentially including delinquent unpaid mortgage installments in their accounting as assets when in fact the mortgage payments would never arrive. Northern Rock, in the UK, was mostly fine but nobody would lend them money because OMG THEY DO MORTGAGES, had to get a loan from the government, which made everyone panic, triggered a run on the bank and got it nationalised. Netbank, usually a lender that would resell mortgages up the chain, tried to disguise their loans as safe, but when it was revealed they werent, were forced to buy them all back, and couldnt find anyone else to buy them, driving them under. So essentially some of the assets of some of the banks have? Theyre subprime mortgages, and nobody wants to buy them or invest in them, making them worthless. If they truly are worthless, people lose confidence in the bank and the bank cant access loans, their share prices tank, and the bank dies. (This is obviously circular in that the suspicion the bank might collapse is enough to make it collapse.) The government is planning on buying these subprime mortgages. So there you have it.