"Exactly" - no-one can answer that. Basically, lenders had been lending to riskier and risker borrowers, on the basis that since house prices would rise for ever, they weren't really risky because by they foreclosed on the bad borrowers, the price would have risen enough to pay them back Particularly, about three years ago, they started giving out a lot of mortgages with two year "easy start" terms: for the first two years, borrowers get a low rate they can afford. But when the two years are up, the rates rise, the borrowers can no longer afford it, and the lenders foreclose. But putting more than a few foreclosed houses on the market makes the housing price stutter - which breaks the assumption the whole pyramid was built on. Hose prices start to fall, and more people are paying mortgages now higher than they houses are worth. So they walk away, and you get more foreclosures, which pulls house prices down more, and so into a spiral. What the original lenders didn't realise was that the high house prices which justified the original lending were created by that lending i.e. they were effectively using themselves to guarantee their own lendings.

the problem also pertains to where exactly the money was coming from. money lended from a bank in honduras is forward lent to a private bank in hawaii and is forward lent to a bank in your home town.. etc etc. things like that have led to a liquidity crisis - the financial industry unsure who the underlying owner of the specified debt is etc etc.