Released: September 02, 2007

Not your parents’ mortgage market

Source: Laura Smitherman, Baltimore Sun (Free Registration)

A generation ago, banks took on deposits and lent that money to homebuyers who took out 30-year, fixed-rate mortgages. That changed when Wall Street got involved in recent decades. Investment banks provided capital to mortgage companies so they could make the loans, and then bought the loans and bundled them into securities that are sold to investors.

Through the magic of “securitization,” the broker, lender and investment bank essentially become fee-collecting middlemen between the borrower and investor. Critics say that the process encouraged riskier loans because each party passes off the mortgage to the next.

Securitization also spurred the rise in the past few years of subprime mortgages for borrowers who have weak credit or modest incomes and are therefore charged higher rates. That translated into higher yields on the securities, a big draw for investors flush with cash. More exotic loans were extended, and for a while it seemed there was a mortgage out there for any borrower.

Read Full Article: Not your parents’ mortgage market