For those who are interested (as this thread seems to have evolved that way) what has happened is as follows:
Loan providers pool the loans, which are then structured into various assets that can be sold on in various tranches. In growing so rapidly, the first stage (pooling the loans) fell apart as proper assessment of the borrowed failed, resulting in the technical analysis to pool the assets falling apart, and losses exceeding those modelled and expected based upon historical losses.
This was compounded by portfolios of assets being further pooled post-securitisation into sub-pools, which were further pooled and securitised, and holdings highly-leveraged based upon the high degree of analysis involved in their construction. A true situation of being precisely wrong, instead of approximately right in their analysis.
Positions in these highly-leveraged structured investment vehicles were hedged through credit default swaps bought from "monolines" (portfolio insurance against default) - the problem being that such a vast quantity of these assets existed that the insurers could not possibly cover the losses involved.
Increased repossesions, falling prices, and huge growth in the industry collided to produce a massive crunch. Nobody knows what exposures sit where, or who the suckers were who bought the assets (AIG were one).