The subprime crisis began with the bursting of the housing bubble in the U.S. and high default rates on subprime and other adjustable rate mortgages(ARM) made to higher-risk borrowers. Loan incentives and trend of rising housing prices encouraged borrowers to assume mortgages, believing they would be able to refinance at more favorable terms later.
However, once housing prices started to drop in 2006-2007 , refinancing became more difficult. In addition, defaults and foreclosure activity increased while ARM interest rates reset higher. The mortgage lenders that retained the risk of payment default were the first to be affected, as borrowers became unable or unwilling to make payments