Subprime mortgages are now making a comeback as nonprime mortgages. Fixed-rate mortgages, interest-only mortgages, and adjustable-rate mortgages are the main types of subprime mortgages. These loans still come with a lot of risk because of the potential for default from the borrower.

At the time, lenders probably saw subprime mortgages as less of a risk than they really were—rates were low, the economy was healthy, and people were making their payments.

Banks, hedge funds, investment companies, insurance companies, and other financial institutions created the MBS and CDOs. They continued to repackage and sell them to investors who believed they were safe investments. The different financial institutions aggravated the situation by taking more risk than necessary.

How do subprime mortgages work? While subprime home loans still exist today — and might be referred to as a non-qualified mortgage — they are subject to more oversight. They also tend to have higher interest rates and larger down payment requirements than conventional loans.