#2. The Mortgage Crisis

The housing bubble finally burst, big time. Defaults on subprime mortgages — high and adjustable-interest rate home loans for people who don't qualify for the lowest market rates — had been rising slowly for a couple of years and by this summer were up 93% from the year before. In April, New Century Financial, one of the largest subprime lenders in the U.S., filed for bankruptcy, the first of a slew of mortgage company failures. Banks worldwide that had money in mortgage-backed securities realized many of their investments were worthless, and the major stock market indexes saw their values drop, prompting central banks in the U.S. and Europe to inject extra cash into their financial systems. As the global economy teetered, columnists blamed companies' predatory lending practices, which doled out cash to people who couldn't afford it and didn't understand the terms of their loans. At least some of them may be in for relief now, as the Bush administration just announced a five-year freeze on mortgage rates for some subprime borrowers facing the threat of default.