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+--- Thread: Frozen Mortgage Rates? Agree or Disagree (/showthread.php?tid=6773)
- G.Irish - 12-06-2007
The problem with mortgage defaults is that groups of mortgages are sold as bonds to investors (domestic and foreign). When a bunch of mortgages default investors lose lots of money. So now that bad news is coming on US real estate these investors start panicking and selling off their US assets.
The post has done a couple of articles on the subject in the last few months.
<!-- m --><a class="postlink" href="http://www.washingtonpost.com/wp-dyn/content/article/2007/12/04/AR2007120402186.html?sid=ST2007120500794">http://www.washingtonpost.com/wp-dyn/co ... 7120500794</a><!-- m -->
There was a better one on it but I can't find it now. Basically what it said was that mortgage bonds (a big group of mortgages sold by a lender) are divided up and sold according to the risk/reward ratio. So you would divide it up according to the creditworthiness of the loans contained therein. So you'd have high risk/high-yield loans, mid-risk/mid-risk loans, and low-risk/low-yield loans. Something that started happening was that the mid risk bonds would get subdivided again and the top of the mid risk loans was getting the same rating as the low risk loans. So they were effectively getting a similar rating to treasury bonds when they had a significant deal of risk involved.
A lot of other trickery like that occurred too which worsened the subprime lending situation and which will have effects on other parts of the investment economy and the economy in general. I am not an economist so my understanding is basic but the point is that the whole mess does have wide ranging effects.