5 Consequences of the Mortgage Crisis

The early part of the 2000s was a godsend for many consumers. Credit flowed with relative ease, making it nearly impossible to be declined for a loan, credit card, or mortgage. Subprime loans were rampant, giving investors and mortgage lenders big profits, but they also helped many people live out the American dream by letting them become homeowners.

While they were a blessing for many people, the economic evils of that period helped trigger the mortgage crisis and the Great Recession. As a nation, we had to pay for our indiscretions, resulting in five consequences due to the subprime mortgage crisis.

Key Takeaways

• The subprime mortgage crisis occurred following lofty real estate values and easy lending for borrowers with low or subprime credit scores.
• The Great Recession ensued, leading to high unemployment and foreclosure rates.
• Although the economy has improved since then, nearly 25% of Americans say they live paycheck-to-paycheck.

The Subprime Crisis: An Overview

Just before the subprime mortgage meltdown, the economy was on the verge of a recession because of the tech bubble. Companies in this sector saw a sharp increase in their valuations, and investment in the industry was also very lofty. In response to this, central bank authorities tried to stimulate the global economy by cutting interest rates. As a result, investors hungry for higher returns began turning to riskier investments.

Mortgage lenders did, too, as they started approving mortgages to people with poor credit scores. Some of these people also had no income and no assets. Lenders repackaged these loans into special investment vehicles—mortgage-backed securities (MBSs)—and sold them to investors.

In addition, lending companies offered consumers risky subprime loans with high interest rates that borrowers could not repay. Brokers also aggressively marketed loan products that they knew would fail.

However, as demand heightened, the housing bubble collapsed, wreaking havoc within the global economy.

Find out the 5 steps to scoring a mortgage.

The Rise of the Slumburb

The crisis spurred an avalanche of home foreclosures that left large sections of once-prosperous suburban neighborhoods vacant and in disrepair. According to the Brookings Institution, the suburbs also saw a sharp rise in poverty, which housed roughly one-third of the nation’s population living below the poverty line.

This phenomenon was perhaps most noticeable in and around Midwestern cities such as Grand Rapids, Michigan, and Youngstown, Ohio. The shift from quiet suburbia to troubled neighborhoods resulted from a combination of factors, including the housing bubble and rampant foreclosures, immigration, changes in the workforce—income levels and higher unemployment—as well as a spike in the population.

More work remains to help low-income earners since nearly 37 million people, or 11% of the U.S. population, were in poverty as of 2023.

The Foreclosure Mess

Besides putting people in the position of having to find somewhere else to live, foreclosure can potentially damage the prospects of a comfortable retirement because a home often represents a sizeable asset. Also, foreclosure can damage a homeowner’s credit score or creditworthiness.

The wave of foreclosures that accompanied the economic meltdown was not as high as the subprime crisis, but people continued to lose their homes. However, during the height of the COVID-19 pandemic, the federal government set a moratorium on foreclosures and evictions, and while the moratorium ended in July 2021, some states extended it.

Perhaps due to these extensions, foreclosures fell to all-time lows in 2021 and edged higher in 2022 but remain near historic lows.

Unemployment

The national unemployment rate hovered near the 10%-mark following the subprime mortgage meltdown but has been trending downward since then.

Although recovery wasn’t easy, the economy has recovered with a 4.2% unemployment rate as of March 2025, compared to the 10% unemployment rate in 2009.

Tighter Credit

Like low unemployment, quick home loan approvals, and unfettered access to credit are things of the past. Whereas just about anybody could get a credit card or be approved for a mortgage before the economy cratered, even those considered well-qualified borrowers can have a hard time getting approved. By some estimates, only one out of 10 applications for a home loan was approved following the market crash.

Tougher Time Making Ends Meet

The recovery has been challenging since the crisis hit, especially for the middle class. In fact, 49% of Americans surveyed by the First National Bank of Omaha said they would probably live paycheck-to-paycheck in 2020.

During a late 2021 survey, more than one in four adults said they found it very difficult to cover their usual household expenses. This information is indicative of the effects of the COVID-19 pandemic, which caused severe financial upheaval for millions of Americans.

In 2024, nearly 25% of U.S. households reported living paycheck-to-paycheck.

Warning

Mortgage lending discrimination is illegal. If you think you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report, either to the Consumer Financial Protection Bureau or the U.S. Department of Housing and Urban Development (HUD).

What Was the Mortgage Crisis?

The mortgage crisis, actually referred to as the “subprime” mortgage crisis, occurred after real estate markets were oversaturated with high-value homes sold to individuals who were less than creditworthy but approved for large mortgage loans.

The real estate market plummeted, and these individuals could no longer afford mortgage payments on homes whose values had fallen during the U.S. recession of 2007 to 2009.

What Is Foreclosure?

Foreclosure refers to the legal process that occurs when a lender tries to recover the money owed on a defaulted loan. When this occurs, the lender takes ownership of the property owned by the borrower in default. A borrower must have missed a specific number of payments before a foreclosure is set into motion.

What Does Underwater in Your Home Mean?

The term “underwater” on your mortgage means you owe the mortgage lender more than your home is worth. From 2007 to 2009, many homeowners found themselves “underwater” on their mortgages when real estate values fell, and interest rates on mortgage payments rose.

The Bottom Line

The mortgage crisis or subprime mortgage crisis occurred following excessive real estate values combined with easy-lending policies that offered mortgages to less than-creditworthy borrowers.

As the real estate market crashed, unemployment and foreclosure rates soared. Although the economy has improved markedly since then, millions of people struggle with poverty or live paycheck-to-paycheck.