Final answer:
The 2007 mortgage collapse was primarily due to a lack of transparency, with banks underestimating the risks of mortgage-backed securities, which were much riskier than expected, leading to widespread bank failures and the 2008-2009 Great Recession.
Step-by-step explanation:
The main reason for the bank mortgage collapse of 2007 can be traced to lack of transparency. Banks initially thought they were purchasing ultra-safe securities because these were backed by mortgages, and they believed they were protected from small or moderate losses. As the housing market declined and many homeowners defaulted on their mortgages, the true level of risk became apparent. The recession led to a sharp fall in house prices, making it difficult for people to repay their mortgages, and banks faced substantial losses from mortgage-backed securities that were previously considered safe. The crisis was exacerbated by the fact that rating agencies had often rated mortgage-backed securities as high-quality, regardless of the actual risk. This misrepresentation, coupled with failing banks and a bust in housing prices, precipitated the 2008-2009 Great Recession.