Why on earth would the mortgage lenders want to offer mortgages to these people?

For two reasons. First, if the mortgage holders did default, the lenders could take possession of the house and sell it on for a profit in the rising market. Second, lenders didn’t usually hang around until the defaults happened; they sold the mortgages on to other financial institutions round the world and reinvested the money they got in return. One method of selling involved slicing up these debts and packaging them together with other pieces of debt in financial products such as Collateralised Debt Obligations (CDOs). These were a recent innovation, and often so complex as to mask the true levels of risk inherent within them, but the market for these grew quickly, with more exotic types being developed and staggering amounts of money changing hands between banks, pension funds and hedge funds during this period (?3 trillion worth of CDOs were sold in 2006 alone). The banks were making huge amounts of money by operating increasing degrees of leverage to magnify their returns, all the while exposing themselves to greater and greater risk. At the bull market’s peak some investment banks were borrowing up to 100 times what they had in capital, which meant that a mere 1% downturn in asset value would be sufficient to wipe that capital out.