Ask SFist -- Subprime?

Subprime mortgages are basically like teaser credit card deals - they start out at a low rate and then jump to something ridiculous.

The difference is that while you run up a credit card buying candy and drugs, a house is supposed to be an investment, giving you a way out before you get fucked. As we shall see, this is called speculation, and is not the way to a healthy financial future.

Scene - a discount lender in the Valley

Buyer: I only make $20k a year but I want to get in on this hot housing market
Broker: That's cool - we can get you a mortgage that starts out at 2% and you can afford that split level in San Buttadido
Buyer: starts out?
Broker: yeah, in 2 years it'll jump to 17% but don't worry - by then you'll be able to sell or refinance
Buyer: I'm retarded. Please explain.
Broker: Well, you're putting down $10k for a house that costs $200k. So you're borrowing $190k, which you can't actually afford at a real interest rate. BUT, the way the market's been going, in 2 years, when it's time to pay the piper, your house will have doubled in value. That means you'll have $210k in equity on a house worth $400k. So you can either sell it and have profited about $200 grand - or you can keep it and get a much more reasonable rate, since you now own half the house.
Buyer: That's great. I'm an American and so I believe I can get something for nothing, and also in faeries and unicorns. Do you also sell those?
Broker: yes. [hits on head with brick]
Buyer: let's do it

Scene - 2 years later, Tulare county courthouse

Judge: Mr Douchebag, you are going to loose that house and have to declare bankruptcy and move in with your parents
Buyer: I'm still retarded. Please explain what happened.
Judge: Well, the housing boom of the last 5-10 years was fueled on speculation just like your purchase. The whole thing was founded on the idea that prices keep going up, which was fueled by more buyers entering the market, which was in turn fueled by greed and stupidity. The subprime mortgages just threw fat on the fire.
Buyer: that sounds familiar
Judge: yes, it's a classic Ponzi, or pyramid, scheme just like when you bought that packet of information about how to get rich selling packets right out of your house about how to get rich.
Buyer: I lost my shirt on that!
Judge: I remember. Now, the problem with the scenario that broker painted for you is that if the house prices drop - or even if they just stay flat - your subprime mortgage will mature, and since you don't have any more income than you did two years ago, you can't afford the mortgage, and since you barely have any equity in the house, you can't even really afford to sell it. You are 100% screwed, and even though it's your own fault, I won't blame you.
Buyer: but why, Professor?
Judge: because it wasn't just you. The entire economy has been feeding on this same greed, from the investment banks on down. I actually own shares of a mutual fund which purchased mortgage-backed securities which basically means that instead of cattle or gold or biotech, I owned a tiny piece of your shitty and financial practices. Believe it or not, when you declare bankruptcy and default on your loan, the loss of value will trickle back up the economic food chain and bite me in the ass to the tune of $1 or something. Really, it's my own fault. Or my accountants. He's in here after you on fraud charges.
Buyer: if he goes to jail, can I live in his house?

I hope you learned something today. I know I did.