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Mortgage Backed Securities |
Foreclosure Effects on Mortgage Backed Securities - Traditionally, lenders evaluated borrowers carefully because they held onto the mortgages for the life of the loan. That process started to change in the late 1980s, as Wall Street found new ways to package the loans into securities to sell to investors.
- Investors were attracted to these new mortgage-backed securities because they paid better returns than government bonds.
- At the beginning of this decade, the Federal Reserve started cutting interest rates to historic lows. So investors poured money into the U.S. mortgage market, particularly into securities made up of high-interest mortgages made to borrowers with poor credit records.
- The high-interest, risky mortgages, called subprime, boomed, from $160 billion in new loans in 2001 to more than $600 billion in both 2005 and 2006, according to Inside Mortgage Finance, a trade publication.
- Lenders stopped worrying about the creditworthiness of borrowers and offered them riskier mortgages. Most of those loans were made by commission driven mortgage brokers, who had nothing to lose if the mortgage went bad because it had been resold.
- When mortgages are packaged into securities, borrowers' monthly payments are divided up and sent to thousands of investors around the world. With so many owners, helping troubled borrowers is tougher. Many of these investors have been reluctant to agree to drastic loan modifications, such as reducing the principal balance, because they don't want to take a big loss
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