Subprime mortgages are generally defined as mortgage loans to borrowers with lower FICO credit scores. These borrowers are considered to be high risk that they may not be able to repay the loan.

In order to compensate for subprime lenders' risk, a higher interest rate is charged to subprime mortgage loans. In the latest housing boom, a large percentage of subprime mortgage borrowers had to take out interest-only and option ARM loans to be able to afford a home purchase. However, the decline in housing has caused a higher percentage of foreclosure in subprime lending.

Although the definition of subprime mortgage is typically accecpted as loans to people with FICO scores lower than 620, there was a loosening in underwriting standards in the past few years. As a result, the subprime mortgage has become a 25% of the entire mortgage market. An continued trouble in this segment could spill into the general mortgage market. Therefore, the US Federal Reserve is keeping a keen eye on the development of the subprime mortgage fiasco.