what was the domino effect (self fulfilling prophecy) of the credit crisis?

[RedGem]

what was the domino effect (self fulfilling prophecy) of the credit crisis.

Please give as much info as you can and try to make it simple to understand.

[donfletcheryh]

Investors discovered that their investments were in sub prime mortgages, felt nervous and required higher interest to take that risk. This cascaded down to the borrowers as total interest payments required that could not be supported. Thus fear of risk turned into risk realized as default came in response to the expectation of higher interest.

Now the insurers of these mortgages did not take a big enough premium to cover systemic meltdown. They were counting on just the normal level of defaults and most of those defaults the homes would be very close to the value of the mortgage, often higher.

When large numbers of defaults and dropping house prices hit the insurers the investors in asset backed securities found themselves effectively uninsured. But their willingness to buy those asset backed securities with very modest return had been predicated on exactly that insurance which could not pay off because the system had paid a low enough premium to make sure there would not be enough reserve for a meltdown.