Subprime mortgages were designed specifically for borrowers with bad credit scores; hence, they are associated with much higher interest rates compared to conventional loans. There are even subprime loans that don't require any proof of income but they carry even higher interest rates. Fact is that the current global financial crisis is indeed caused in part by the US subprime mortgage meltdown.

We are using the word "meltdown" for a good reason - one of the strongest national lenders felt the crisis as Wells Fargo cut down over 500 employees in its subprime lending department, while New Century which was the third largest subprime lender in 2Q 2006 filed for bankruptcy. It's a really problematic, but hopefully not catastrophic situation, or at least not yet.

The entire mortgage meltdown revolves was triggered by the record rise in mortgage delinquencies and foreclosures in the USA, and these problems caused severe consequences for financial markets and banks around the world. The crisis became absolutely obvious in 2007 as in this year, all the weakness caused by these subprime loans was completely exposed and the effects were felt by consumers.

A crucial factor in this process is that over 80 percent of all subprime US mortgages in the last several years, have been a mortgage type known as ARMs, or "Adjustable Rate Mortgages". The thing is that as the real estate bubble bursted, house prices went down reaching record lows as such, the adjustable-rate mortgages started to reset at much higher rates making borrowers completely unable to cover the increased monthly payments.

But how did the subprime mortgage crisis affected the global financial markets? The answer lies in the mortgage brokers, who made big bucks by buying sub-prime mortgages from lending companies, and then selling them to investors worldwide, including to some of the most respectable firms on Wall Street.  Wall Street firms even had special investment units designed specifically for sub-prime mortgages which were sold as "mortgage-backed securities" to wealthy investors from all over the globe. As long as these investors were getting paid on the high interest rates on their bonds, they were happy and willing to do even more business.

To understand how this whole system works, you have to realize that to investors and brokers, mortgages are seen as streams of future cash flows, which could be bought, sold, tranched, and securitized. Most of these mortgages are sold on the secondary market that's characterized by its large size, and high liquidity. Of course investors were aware that all these mortgage-backed securities carried some risk, they didn't realize that things will turn out as bad as they did for the economy, ultimately resulting in serious money losses. That's how everyone got caught by surprise by the financial storm, and now we are experiencing some really heavy consequences. Some analysts suggest that the crisis will continue at least until the first half of 2010, and that's in fact the date believed by the US government.