Subprime lenders sell most of their loans to investment banks, which repackage them into mortgage bonds. Many of the riskiest slices of these end up in complex securities like collateralized debt obligation. Investors who then buy these CDOs are still trying to determine how much pain the subprime mess will cause, so they are not keen on buying new CDOs--even if the underlying loan quality is better.
Without the former CDO demand, mortgage lenders are having a harder time selling their loans at a profit.
