What exactly does "subprime" refer to in the "subprime mortgage crisis"?

好的，没问题。咱们用大白话聊聊这个事儿。

Imagine you go to a bank to borrow money for a house. The bank definitely needs to check your financial background first, right?

They'll look at your job stability, income level, and whether you've repaid previous loans on time (i.e., your credit history).

Two Types of Mortgages: The 'A-Students' and the 'Strugglers'

Banks categorize borrowers into two types:

Prime Borrowers (Prime): These are people with stable jobs (like doctors, lawyers, civil servants), high incomes, and a credit history as good as gold. Banks love them. Loans given to them are called "prime loans". These loans have low interest rates and low risk.
Subprime Borrowers (Subprime): These individuals might have unstable incomes, poor credit histories, or even a record of defaulting on loans. In the bank's eyes, they are "high-risk individuals". Lending money to them makes banks nervous. Loans given to them are called "subprime loans", or simply "subprime".

So, in plain terms, a "subprime mortgage" is a housing loan issued to individuals with lower credit ratings and weaker repayment abilities.

What Did Banks Gain? Why Lend to the 'Strugglers'?

You might ask, if the risk is so high, why would banks still lend to them?

There are two main reasons:

High Interest: Higher risk demands higher returns. Banks would tell subprime borrowers, "Lending to you is very risky, so you'll have to pay much higher interest than others." This was a lucrative opportunity for banks, offering huge profit margins.
Ever-Rising Housing Prices: Before the subprime mortgage crisis erupted, US housing prices were continuously rising. Banks had a little calculation in mind: "Even if you default and run away, no problem, I'll repossess your house and sell it. Because housing prices are rising, I won't just avoid a loss; I might even make a profit."

How Did 'Subprime' Turn into a 'Crisis'?

This is the crux of the matter. Originally, this was just a matter between banks and homebuyers. How did it turn the world upside down?

Because those financial geniuses on Wall Street pulled off a "clever maneuver": Asset Securitization.

It sounds complicated, but it's essentially "packaging and selling".

Packaging: Banks didn't want to hold onto all these high-risk "subprime" loans themselves. So, they bundled thousands of loans (both prime and subprime) together to create a "financial product", much like a fruit basket containing both good and bad apples. This product was called MBS (Mortgage-Backed Securities).
Rating: They also hired rating agencies (like Moody's and S&P) to rate these "fruit baskets". Because good apples were mixed in, many of these "fruit baskets" were rated AAA, the lowest risk.
Selling: Then, banks sold these seemingly safe and profitable "AAA-rated fruit baskets" to investors worldwide, such as banks in other countries, pension funds, insurance companies, and so on.

Then, the bubble burst.

US housing prices stopped rising and even began to fall. At the same time, the initial low-interest grace periods for many "subprime" loans ended, and interest rates soared.

The chain reaction began:

A large number of "subprime borrowers" found they couldn't afford their monthly mortgage payments and had to default.
Banks repossessed a huge number of houses, but because housing prices were falling, the money from selling them wasn't enough to cover the original principal lent out, leading to massive losses for banks.
The "bad apples" in those "fruit baskets" (MBS) sold worldwide began to rot, making the entire "fruit basket" worthless.
All investors who bought these products (global banks, funds, etc.) were left with a pile of "financial junk", their assets evaporated instantly, triggering huge losses and a wave of bankruptcies.

Ultimately, a financial tsunami triggered by the housing loans of America's "strugglers" swept across the globe.

To summarize simply: "Subprime mortgages" are high-interest housing loans given to high-risk individuals. And the "subprime mortgage crisis" was when these high-risk mortgages collectively defaulted as housing prices fell, and through the method of "packaging and selling", the risk was transmitted worldwide, ultimately leading to a global financial disaster.