The housing boom caused banks to give out ever more mortgages, often to unverified lenders that couldn't afford them. These loans were then sold to Wall Street investment banks, which packaged them into derivative products such as MBSs and CDOs. Cheap money freed hedge funds and other investment institutions to borrow heavily to invest in these derivatives, inflating their value even more.
But as interest rates started to rise in the mid-2000s, homeownership reached a saturation point, pushing real estate prices to drop and people to default on their loans, effectively rendering these credit products worthless and bursting the housing bubble as well as collapsing Wall Street.