Subprime mortgages are loans to high-risk borrowers at higher interest rates than normal. Many of the rates on these mortgages were adjustable, with initially low teaser rates that adjusted upward at fairly significant increments.

Banks and mortgage companies sold these loans in packages to investment companies who, in turn, repackaged them and sold them as securities. It has been reported that subprime mortgage originations grew from $120 billion in 2001 to more than $600 billion in 2006.

(Editor's Note: Various sources cite these figures, including Federal Reserve Board Chairman Ben S. Bernanke in a March 14, 2008 speech citing Inside Mortgage Finance. Higher figures are cited in a Bloomberg.com report, “Subprime Fiasco Exposes Manipulation by Mortgage Brokerages, May 30, 2007,” which indicates that subprime originations were $722 billion in 2006, down from a record $805 billion in 2005.)

These mortgages were initially extremely profitable for those selling them. Hence, the huge increase in subprime loan originations.

However, when interest rates began to climb, monthly mortgage payments began to adjust upward and many subprime borrowers could no longer afford their mortgage payments, thus defaulting on their loans. Further, when the real estate market began to stall and decline in value after years of steady growth, the outstanding loan amounts in many of these subprime mortgages often exceeded the value of the property. As a result, there have been billions of dollars in write-downs and financial losses from these bad loans.