Final answer:
Subprime loans were securitized and sold as bonds in the early 2000s, disconnecting the risk for lenders and incentivizing riskier loans. Investors absorbed varying levels of losses, which led to the expansion of subprime lending. This contributed to the banking crisis and the failure of 318 banks between 2008 and 2011.
Step-by-step explanation:
In the context of the global economic crisis in mid-2000, a true statement about subprime loans is that changes in finance and banking laws in the 1990s and early 2000s allowed lending institutions to securitize their mortgage loans and sell them as bonds. This process detached the financial interests of the lender from the repayment ability of the borrower, making risky loans more attractive to lenders. Furthermore, this securitization model embedded a layering of risk, where some investors agreed to absorb the initial losses on these mortgage-backed securities, while others were insulated unless losses became excessively high. These practices contributed significantly to the expansion of subprime lending, setting the stage for the subsequent banking crisis, as falling housing prices and a deepening recession caused many borrowers to default, leading to significant losses for financial institutions and the failure of 318 banks between 2008 and 2011 in the United States.