It went something like this: Legislation making getting loans easier with pressure on banks to make loans (lowering their requirements by force). Local banks making loans to under-qualified people. Housing prices rising due to more 'qualified' buyers. Everyone wanting to jump in on this new bubble. A rush for everyone and their mother now going out and getting their homes refinanced at a higher valuation and taking the cash as a down payment. This continues for a few years and people keep doing this over and over. Even if they didn't buy multiple homes they bought a more expensive one. The reason this didn't matter to anyone was the small banks were bundling them up (not tranches - wrong word) and selling them to investment banks. They then didn't have the debt on their own books anymore so who gives a shit if it was a bad loan. Then the credit rating agencies had reverse incentive of giving a real score. So they rate them at the same rating as the US Govt. Virtually impossible to default. People started realizing it was a bubble and now the price increases slow and even reverse back. Peoples ADJUSTABLE rate mortgages just became more expensive. A $2000/m becomes $2500/m for example. Then to compound the ensuing shit storm the banks get talked into creating CDS. These are not actually backed by an asset. It is just straight gambling. They pay out in huge multiples of the actual asset value, and then you could bet on these, exponentially raising their risk even more! So the banks then start selling off their risk at 70 cents on the dollar when they realize. This goes on for a day or two. Eventually reaching around 20-40 cents. Well then some cleaver people realized the government was going to buy all of these at $1/$1. Making shitloads for the ones that actually got a bailout. Sucks for you Bear Sterns. And to wrap everything up we are in a very similar scenario all over again with Student Debt. Government forced banks to make shitty loans to students. People will say well they can't default on them because it is literally the only thing you cannot default on. Well bad news, if people aren't making payments... well that's where I don't actually know. People actually in finance probably know.
Disclaimer: Not in finance. Definitely made some mistakes. People can point out flaws or just downvote if entirely wrong. But that's pretty much what happened. Not going to reply, I know I made errors, just point them out to the other readers.
Super technical info on how to fix by former traders for anyone with nothing to do