In the booming days of the housing market, low interest rates and increasingly lax underwriting standards meant many people were able to obtain mortgages who would not have been able to under ordinary circumstances. These borrowers, many of whom had poor credit histories, were called 'subprime' in the mortgage industry. Many of the mortgage loans that went into default were from these riskier borrowers.
In testimony before Congress, officials from the Federal Reserve noted the rapid rise of subprime lending. Sandra F. Braunstein,_Director of the Division of Consumer and Community Affairs, noted that in 1994, fewer than five percent of mortgage originations were subprime, but by 2005 about 20 percent of new mortgage loans were subprime.
She said that the rise in subprime foreclosures resulted from a combination of economic conditions including rising interest rates and slowing house price growth. Until the about 2005, borrowers with adjustable rate mortgages could cope with payment increases by refinancing or in some cases selling, because the hot real estate market kept pushing house prices up.
But in 2006, mortgage interest rates hit four-year highs, the volume of home sales fell and the rate of house price appreciation slowed or in some cases home prices fell, leaving the most recent subprime borrowers with payment difficulties. Subprime borrowers with adjustable-rate mortgages (ARMs) started to struggle with delinquency and foreclosure rates.
As time went on, the problems spread to many creditworthy borrowers, who had been tempted into taking out loans that were bigger than they could comfortably afford. When the economy slowed, many homeowners lost jobs or faced pay cuts, many got behind on their payments, and a sinking housing market meant they could not sell their houses and pay off their mortgages. Many began to default on their loans.