To make mortgage-backed securities, securitizers needed MORTGAGES to BACK the securities (editorial decidion to save synthetic CDOs for another day)
The Ponzi-like twist with teaser rate mortgages is that unqualified borrowers had to be refinanced into NEW mortgages with NEW low teaser rates before the initial (or prior) teaser period expired. Instead of new money bailing out the old, new teaser rate ARMs bailed out the old.
Until, that is, home prices stopped climbing.
When home values stopped appreciating in late 2005, so (obviously) did home equity. Soon, prices started falling. Without the additional wealth produced by ever-growing home equity,nonprime borrowers could not refinance. There were no new teaser periods to bail out the old. Each month, as more loans reset to higher rates, more borrowers could not afford their homes. The Ponzi-like scheme collapsed. Subprime and Alt-A Mortgage defaults skyrocketed.