[Bobblehead]

Sub-Prime Mortages are loans given to people with bad credit. These people can't normally get the best rates, but companies came along to offer these "high risk" people credit. Often it was for a low fixed rate for a couple years, then a higher variable rate after that.

People would make minimum payments, and when it came time to renegotiate they would have better credit history and some equity built up so they could get better rates.

But then the interest rates dged up and the housing market flattened (or even declined a bit). Suddenly people weren't able to make their payments, their homes had no equity (or negative equity) and they started to default. Now the company that offered them the mortgage now had a house that wasn't worth as much as they had intially loaned, so they loat money. Then it happened again. and again. Until finally a bunch of these companies went out of business.

But on the back end, these companies had re-packaged a bunch of this debt and sold it as bonds. Now these companies are gone and the bonds are worthless.

That has scared the markets. They are now examining all the money they have loaned out, and not wanting to loan out any more because a) they are going over any investment very critically and b) they already have a bunch of money loaned out at a much higher risk than they expected, so they need to cover their asses.

As a result, companies that need money are having a much tougher time getting it because the places they normally get it are already worried about the risk they are carrying.

The money "added" to the banking system is really just these banks allowing other institutions a little leeway, by allowing them to do things like synchronize payments due to coincide with when some of these payments they receive are coming due. It is like saying you don't need to pay your bills until payday, instead of mid-week.

The issue is these sub-prime loans are going to continue to come due and perhaps default for a few more years. And this whole situation hasn't happened exactly like this ever before, so economists aren't sure if this will put the economy into a recession, or if things will self correct (because housing prices fall, it makes it more affordable, more people are able to buy a house, and voila - things balance out).