What is a sub-prime loan and did it contrubute to the current recession?

“A home loan or mortgage made to a borrower who has a poor credit record or to a party who would not obtain a loan from most other finance sources. Generally ‘subprime’ loans are those made to borrowers who have no income, no job or no assets (NINJAs); do not wish to provide any proof of income or details of assets or liabilities; have an adverse credit record; have an existing high level of debt (especially when there is a low down payment or the borrower has an existing mortgage on the same property to another lender); or borrowers who have made an arrangement to prevent immediate bankruptcy. In particular, in the US, a subprime loan is a residential mortgage that will not qualify for sale to the Federal National Mortgage Association (FNMA or Fannie Mae) or the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) and cannot be securitized into a pool of mortgages that can be guaranteed by the Government National Mortgage Association (GNMA or Ginnie Mae). As a rule the borrower pays a higher fee and a higher interest rate compared to a conventional mortgage loan to compensate the lender for the greater risk of default. It is common practice for a subprime loan to place limits on the ability of the borrower to reduce the interest rate during the term of the loan and the loan may well carry a penalty for early repayment. A mortgage granted on the basis of limited information or documentation provided by the borrower may also be called a ‘low-doc mortgage’. Also spelled ‘sub-prime’.”   Encyclopedia of Real Estate Terms, Third Edition

Yes, if you allow banks to ignore the basic tenets of banking. The three Cs – cash flow, collateral and character.

If the borrower (or mortgagee) does not even have an income, the loan is for the total value of the house and there is a dubious credit history, then all will unwind like the spring in a clockwork doll. If the bank then sells the loan on to someone else, and no longer cares where it has gone, then the retaining screws are lost. The doll cannot walk or talk and no one cares any more. The big bad bank takes the house and you have to move in with someone else. But you can always but another doll from China.