Now that Freddie Mac is stepping up to help all subprime borrowers to do something with their mortgages, we need to look at what led to all subprime crises.

More and more bond traders buy and sell bonds that are backed by a mortgage payment of any homeowners. These also included Options ARM loans. Bond traders simply make bets how many people repay these type of mortgages and when.

Banks have been selling their mortgage since early 1970s. From one side lenders get immediate cash for selling their portfolio, on the other side bond traders get borrowers monthly payments and promise to pay back. All of this will let lenders create new loans.

However, Wall Street investors do not keep mortgages in their pockets for a long time. They find creative ways of reselling these loans even further. And because of this, lenders stopped worrying about credit guidelines and let more risky loans pass through.

Wall Street investors use what is called "collateralized debt obligation".  This simply means that you can combine bonds, stocks, fixed income securities and create new set of income. This leads to a technique called credit tranching, which refers to creating multiple classes or tranches of securities. For example, four classes of securities are designated as (1) senior debt, (2) mezzanine debt, (3) subordinate debt and (4) equity. Each class protects the ones senior to it from losses on the underlying portfolio.

This means that there is pre-determined priority in servicing of each portfolio where losses are assumed by the holders of the subordinate trenches. You can sell the rights to an investor to be the first one to get paid on this package. This creates a safe investments for an investor. Other investors who would be willing to buy this as well will be far back and might not get paid at all, due to risky loans. But Wall Street investors can simply offer very high yields which lures hedge funds and pension funds to buy.

But with so many homeowners not being able to repay their debt, bond holders or investors might be more selective where and what they buy in the future. This led most major Wall Street investors skeptical from buying these loans at all, and left major sub-prime banks hanging above water. Most of these banks could not sell their portfolios anywhere and ultimately these banks closed their doors down.

From now banks will create more strict guidelines for mortgages and this leave an ordinary borrower in a position of maintaining their credit. Bad credit will no longer help you to purchase a house you wanted so it is time for an improvement.

However, the good news for an existing homeowners who received Option ARM loans is that if you cannot make your payments on time, Freddie Mac is stepping up to help all homeowners with new set of guidelines.