Is it subprime mortgages or mortgage-backed securities?
If the actual rate of foreclosure is .2%, with half of those being from sub-prime mortgages, how is it that mortgage-backed securities are also failing, given that most of the people 98.8 percent are paying their mortgages, thus most of the mortgages backing the securities are flush. I am confused, sorry.
Tags: mortgagebacked, Mortgages, Securities, Subprime
People are overreacting. They must be assuming that foreclosures will skyrocket. GNMA funds are probably good investments. Years ago I invested in some GNMA securities. Some were around $ 30,000 originally, but now they have paid down the principal and are now down to about $ 600 on an original principal balance of $30,000. I got them when the interest was 9% and cannot understand why 100% of the principal hasn’t been paid off through refinancing at a lower rate.
It’s both. Not sure where you got your foreclosure rate number, but the current number is much higher. I will look for a link and post it in a moment.
Still we would have been OK, but for the bogus derivative investments created through mortgage backed securities that increase the effect of the defaults. In effect, subprime loans were packaged and transformed into AAA bonds.
The mortgage backed securities are packages of loans, with varying rates of interest. For example, there are “A” packages, with full documentation to “C” packages with sub-prime, alt-A, etc., more risky but with a greater reward. The mortgage market is in the trillions, and the buying and selling of these mortgages is what keeps cash flowing through the system. If one part of that gets clogged up, the market becomes tighter, that’s why we have a liquidity crisis now. Most people are paying their mortgage, in some parts of the country it’s 99.9%, in other, overheated areas, it’s 90%. This disparity is what prevents the smooth buying and selling of these mortgages. The problem is that the percentage of defaulted mortgage obligations, while small, are coming into a system that is not designed to handle even that number of defaults, and it’s causing banks and securities dealers to experience a liquidity crisis. If no one wants to buy mortgages, you don’t have fresh capital to make more.