The US subprime crisis intensified after the housing bubble burst, which ultimately resulted in high default rates on higher risk borrowers, such as subprime and other Adjustable Rate Mortgages (ARM). Once the housing prices started to drop sharply, home loan refinancing became more and more difficult. Defaults and foreclosure activity increased steeply as ARM interest rates reset higher, making it even more difficult for borrowers to repay. One of the major causes of the Lehman Brothers' default was its exposure to the subprime market. The aftershocks from the subprime crisis caused widespread panic in the global financial and capital markets, encouraging investors to abandon risky mortgage bonds and volatile equities.

The term subprime lending refers to the practice of making loans available to borrowers who do not qualify for normal market interest rate loans due to various risk factors, such as income level, size of the down payment made, credit history and employment status. Subprime mortgages are defined as housing loans which do not conform to the criteria for prime mortgages, and also have a lower probability of the full repayment of mortgages. Subprime mortgage loans are made to home loan borrowers who have higher credit risks compared to prime mortgages, because of irregular payment in the past, higher amount of debt compared to income level and such other factors. According to Federal banking and thrift regulatory agencies, subprime mortgages are those made to borrowers who display among other characteristics, (i) a previous record of delinquency, foreclosure or bankruptcy, (ii) a low credit score, and/or (iii) a ratio of debt service to an income of 50% or greater (Office of the Comptroller of the Currency, et al, 2007).

Subprime mortgages were mainly responsible for an increased demand in housing and home ownership rates in the US. The overall US home ownership rate increased from 64% to 70% between 1994 and 2004. This surging demand helped fuel housing price hike and consumer spending. Between 1997 and 2006, American home prices increased by 124%. This is, partly, due to the encouragement from the Federal government for the consumption economy after the September 2001 disaster to boost domestic economy based on consumer spending.

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