A subprime lender is one who makes loans to borrowers who do not qualify for loans from mainstream lenders. It?s a market that has evolved to permit borrowers with poor credit history and an unstable financial situation the opportunity to get home mortgages. The catch is they pay a higher and typically an adjustable rate mortgage. Encouraged by the housing bubble, easy credit, and the expectation that housing prices would continue to appreciate, many subprime borrowers took out mortgages they could not afford in the long run, particularly if interest rates rose and housing prices depreciated.

As with most economic problems, we find the hand of government. The Community Reinvestment Act of 1977, whose provisions were strengthened during the Clinton administration, is a federal law that mandates lenders to offer credit throughout their entire market and discourages them from restricting their credit services to high-income markets, a practice known as redlining. In other words, the Community Reinvestment Act encourages banks and thrifts to make loans to riskier customers.