Reply #88: My understanding

[Robbien]

(Please keep in mind I'm not an financial instrument expert)

But my understanding is,

Once a mortgage contract is signed and on the books of a bank, it is quickly moved off, combined with hundreds of other securities, all of which are chopped and diced and then recombined into various CDOs. The CDO's are sold to other banks and hedges who combine them with other securities, chop and dice and then recombine into other various CDOs and sold to other banks and hedges. Repeat and repeat and repeat.

There is no real money to be had in holding on to a CDO, the big money is in the fees charged in buying and selling CDOs.

Then throw into the mix that reinsurance and swaps are created for every one of these transactions (which of course have massive fees of their own) and even these are combined with the pieces of mortgages, all of which are chopped and diced and combined as new CDOs and then enter the buying and selling game.

All of this is unregulated. There is no one exchange which keeps track of the instruments (Europe is talking about setting one up but the US is very much against it).

No one really knows who holds the original mortgage, which is a huge problem in the foreclosure process. People who have the cash can fight a foreclosure in the courts just by insisting that the bank provide proof of being the primary mortgage holder.

A homeowner pays his mortgage not to the bank but to a mortgage processor, that mortgage processor doesn't necessarily have anything to do with actually being the holder of the mortgage. A mortgage processor is just an outside contractor hired by the banking system to process the homeowners repayment of the mortgage.