Creative

B-paper

Wiki info

The subprime mortgage crisis arose from 'bundling' American subprime and American regular mortgages into MBSs which were traditionally isolated from, and sold in a separate market from, prime loans. These 'bundles' of mixed (prime and subprime) mortgages were based on asset-backed securities so the 'probable' rate of return looked superb (since subprime lenders pay higher premiums on loans secured against saleable real-estate, which was commonly assumed "could not fail"). Many mortgages had a low interest for the first year, and poorer buyers' defaults were 'swapped' regularly at first, but finally, such borrowers began to default in large numbers. The inflated house-price bubble burst, property valuations plummeted and the real rate of return on investment could not be estimated, and so confidence in these instruments collapsed, and all less than prime mortgages were considered to be almost worthless toxic assets, regardless of their actual composition or performance. Because of the "originate-to-distribute" model followed by many subprime mortgage originators, there was little monitoring of credit quality and little effort at remediation when these mortgages became troubled.