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This is just wrong. Individual mortgages, not just tranches of mortgage-linked liabilities, are considered prime or subprime [0]. At some point, holders of sub
by dmurray 9y ago
This is just wrong. Individual mortgages, not just tranches of mortgage-linked liabilities, are considered prime or subprime [0].
At some point, holders of subprime mortgages began to default more than lenders' models predicted, either because the models were unintentionally wrong or because they were fraudulent, and there's a huge grey area where they could be a little of both.
[0] http://www.investopedia.com/ask/answers/07/subprime-mortgage.asp http://www.investopedia.com/ask/answers/07/subprime-mortgage...
- iheartmemcache 9y agoHe misused the terminology but basically got it right. The originator of the loan (your local bank is probably just a broker, who is acting as an intermediary for a wholesale vendor) then sells it to a REMIC[1]. It's tranched by the REMIC and sold off to institutional investors. These were properly labeled as mortgage backed securities[2] for residential real estate. This is all by the book, mind you. At least that's how it was conventionally done. If our housing market crashed with this system in place, we would have seen a hit but it wouldn't have affected things nearly as badly. It became 'systemic' when bankers decided to trade 'synthetic CDOs' in volume[3]. [1] https://en.wikipedia.org/wiki/Real_estate_mortgage_investment_conduit https://en.wikipedia.org/wiki/Real_estate_mortgage_investmen... - [For context, Freddie Mac/Fannie Mac were REMICs] So what OP meant when he said "prime / subprime" was a misuse of terminology, but if he replaces 'prime' with 'AAA' and sub-prime with 'BBB and Residual' -- he's more or less on the mark there. [2] US-FNMAMBS, IIRC [3] https://en.wikipedia.org/wiki/Collateralized_debt_obligation#Explanations_for_growth https://en.wikipedia.org/wiki/Collateralized_debt_obligation... Start reading here