Home loans to borrowers with less than great credit are called sub-prime loans. In recent years, lenders have created more mortgage programs for those with sub-prime credit ratings. Some of these loans were made with as little as zero to only 5% down payments. Lenders also promoted "Stated Loans". A stated loan is done with no verification of the borrowers income.
Lenders did charge a premium to lend to sub-prime borrowers. No down payment and stated loans included additional add-ons (higher interest rates). Despite the fact that lenders charged more for these loans, the rates were not that much higher than "A" grade loan rates.
The recent slump in the housing market has depressed the value of many homes. Many that put down less than 10% in recent years now owe more than the house is worth. Although foreclosures are on the rise for all borrowers, sub-prime borrowers seem to be the first not able to make payments. Those who stated more income than they actually had are finding themselves in foreclosure at an alarming rate.
Sub-prime mortgages are owned by many banks and investment firms. The rising foreclosure rate makes it difficult for the owners of these loans to know what they are worth as investments. This uncertainty has caused a "credit crunch" in the lending industry. A credit crunch is when banks reduce the amount of money available to lend to individuals and businesses. The Federal Reserve bank has recently cut short term interest rates and added liquidity to the banking system to encourage banks to lend.