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Yael Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Aug-10-07 06:11 PM
Original message
If I can add to this
It is the pooling of like instruments. On top of Fannie Mae, there are also Freddie Mac, Ginnie Mae and other underwtiting clans.

If a bunch of loans are done through the FhA/VA (for example), they will be put into pools (traunches) based on their term (15 yrs, 30 years) and their interest rate (7.5%, 8%). Just as mentioned in the opening post, Ginnie Mae (the group that works with those government loans) will then stamp their approval that every loan in the bunch is being done to Ginnie Mae's underwriting standards and off they go to the market to be sold to investors.

The minimum investment in a traunch is $25,000 (or used to be), so investors in real estate traunches are typically pension funds and insurance companies -- entities looking for higher payment, longer term debt and are willing to risk a little more for it (the risk is foreclosure as noted).

When the sub-prime market took off, it was like junk bond heaven. They were still pooling these instruments, but without backing from Freddie/Fannie/Ginnie as was noted above. To make things interesting, you would have a traunch of VERY high risk loans that may be bringing in 20% interest on the mortgage, or they may mix and match them. This is your house of cards. People getting mortgages approved that had no business doing so because the lender's greed just couldn't take saying "you can have $500/month" if they thought they could squeeze the $750/month blood out of the proverbial turnip.

People then pay exhorbitant interest rates for this house that they would not normally qualify for and then once they are in it and can't keep up the payments -- it all goes to seed. Their credit is ruined, the bank is holding property (and paying taxes on it), the investors lose out on their investment in the loan. Everyone is affected.

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  -The collapse of the sub-prime market & the liquidity crunch explained through It's a Wonderful Life HamdenRice  Aug-10-07 05:20 PM   #0 
  - Correction, it was not "Evil Mr. Baily", it was evil Mr Potter  whistle   Aug-10-07 05:25 PM   #1 
  - Right  HamdenRice   Aug-10-07 05:31 PM   #2 
     - Interesting point in the movie as well - the liquidity crisis George found himself in was caused by  A HERETIC I AM   Aug-10-07 05:38 PM   #6 
  - Highly Recommended...Thanks  Flabbergasted   Aug-10-07 05:33 PM   #3 
  - Excellent and lucid. Nicely written. Now, clarify for the others what the "Tranche" is.  A HERETIC I AM   Aug-10-07 05:35 PM   #4 
  - A tranche  HamdenRice   Aug-10-07 05:42 PM   #8 
     - If I can add to this  Yael   Aug-10-07 06:11 PM   # 
  - A very good post  Elspeth   Aug-10-07 05:36 PM   #5 
  - The director was really into "progressive capitalism"  HamdenRice   Aug-10-07 05:42 PM   #9 
  - I really enjoyed your description  Phoebe Loosinhouse   Aug-10-07 05:39 PM   #7 
  - and in the end the savings and loan is saved by in infusion of the peoples money.  kansasblue   Aug-10-07 05:44 PM   #10 
  - Good point -- but probably no  HamdenRice   Aug-10-07 05:51 PM   #12 
  - Umm, yeah, we did, and so did the Europeans  DCKit   Aug-11-07 03:10 AM   #35 
  - A question for you  KT2000   Aug-10-07 05:46 PM   #11 
  - Over-collateralization  HamdenRice   Aug-10-07 05:57 PM   #14 
     - Indeed  Yael   Aug-10-07 06:02 PM   #18 
     - It should be noted that not all REIT's act the way you describe  A HERETIC I AM   Aug-10-07 07:20 PM   #26 
        - You are absolutely correct and I apologize that I wasn't clear  Yael   Aug-10-07 08:28 PM   #30 
     - Thank you...................K&R  KT2000   Aug-10-07 06:15 PM   #21 
  - It really is very good n/t  malaise   Aug-10-07 05:53 PM   #13 
  - Thanks for suggesting the repost! nt  HamdenRice   Aug-10-07 06:11 PM   #19 
  - Most excellent thread!  DemReadingDU   Aug-11-07 06:01 PM   #64 
  - I sent it to my sibblings and some friends  malaise   Aug-10-07 06:21 PM   #22 
  - You say  truedelphi   Aug-10-07 05:58 PM   #15 
  - Good point, truedelphi.  Uncle Joe   Aug-11-07 01:30 PM   #54 
  - This post is a work of art  Yael   Aug-10-07 06:00 PM   #16 
  - Coming from someone of your background ...  HamdenRice   Aug-10-07 06:01 PM   #17 
     - Very kind of you to say!  Yael   Aug-10-07 06:13 PM   #20 
  - Very helpful post and comments to questioners. A Big  salin   Aug-10-07 06:32 PM   #23 
  - Thanks for this!  bonito   Aug-10-07 06:45 PM   #24 
  - K&R...  KoKo01   Aug-10-07 07:19 PM   #25 
  - Red'd as promised...and  karlrschneider   Aug-10-07 07:21 PM   #27 
  - I was thinking about this movie today as well  buddyhollysghost   Aug-10-07 07:22 PM   #28 
  - "We Americans continue to funnel more money into Potter's pockets even though we know what he...  scarletwoman   Aug-11-07 09:33 AM   #41 
  - Thank you - you are one DUer I admire a great deal  buddyhollysghost   Aug-11-07 10:03 AM   #44 
     - No, thank YOU for writing so well! Both your posts are eloquent and to the point!  scarletwoman   Aug-11-07 10:46 AM   #49 
        - It's refreshing  buddyhollysghost   Aug-11-07 02:31 PM   #59 
           - Thanks back atcha! It's been a delight to converse with you!  scarletwoman   Aug-11-07 02:47 PM   #62 
  - Very astute post and I will never look at IAWL again without thinking of all these theories!  1776Forever   Aug-11-07 10:32 AM   #47 
     - Thanks!  buddyhollysghost   Aug-11-07 02:33 PM   #60 
  - Thanks very much HamdenRice !  LibertyorDeath   Aug-10-07 07:31 PM   #29 
  - K&R!!!  Karenina   Aug-10-07 09:15 PM   #31 
  - And another  Elspeth   Aug-10-07 09:37 PM   #32 
  - thanks from one of the lucky survivors (thanks to DU warnings) who sold last November-nt  fed-up   Aug-10-07 09:54 PM   #33 
  - as am I, I cashed out last July from overheated Phoenix  AZDemDist6   Aug-11-07 02:40 AM   #34 
     - yes, I was in shock and panic mode trying to make increased payment-DU helped me focus and SELL nt  fed-up   Aug-11-07 07:25 AM   #36 
        - I wasn't caught in an ARM, but my little house's 'value' had skyrocketed  AZDemDist6   Aug-11-07 09:30 AM   #40 
           - .....  AZDemDist6   Aug-11-07 02:31 PM   #58 
  - Kick n/t  malaise   Aug-11-07 08:19 AM   #37 
  - Hey thanks for this.....  Klukie   Aug-11-07 08:28 AM   #38 
  - I have a question  leftchick   Aug-11-07 09:22 AM   #39 
  - "Also aren't they supposed to be regulated so this does not happen?"  scarletwoman   Aug-11-07 09:51 AM   #42 
  - How wonderfully stated!  Karenina   Aug-11-07 02:28 PM   #57 
     - Thanks! This is an inspiring thread, isn't it!  scarletwoman   Aug-11-07 02:43 PM   #61 
  - Good question  HamdenRice   Aug-11-07 10:22 AM   #46 
     - And let's not forget the Greenspan debacle in all of this - what character would he be in the movie?  1776Forever   Aug-11-07 10:42 AM   #48 
        - See? Greenspan was one of the Grand Inquisitors, keeping the demons of regulation at bay,  scarletwoman   Aug-11-07 10:57 AM   #50 
           - Got it! The secret government -  1776Forever   Aug-11-07 05:06 PM   #63 
  - Also, k & r -- your post is performing a WONDERFUL service! Absolutely excellent!  scarletwoman   Aug-11-07 09:58 AM   #43 
  - Thank you for your time to explain this crisis in such an interesting manner!  1776Forever   Aug-11-07 10:14 AM   #45 
  - *kick* -- Hope others will keep kicking this up also -- such an excellent post! (nt)  scarletwoman   Aug-11-07 11:19 AM   #51 
  - GREAT thread initally, and very much enhanced by the replies. Bookmarking & sharing.  catzies   Aug-11-07 11:30 AM   #52 
  - Another kick... (nt)  scarletwoman   Aug-11-07 12:22 PM   #53 
  - Well done, HamdenRice!  Uncle Joe   Aug-11-07 01:33 PM   #55 
  - k  leftchick   Aug-11-07 02:06 PM   #56 
  - I've got a much simpler and more direct metaphor  brg5001   Aug-11-07 06:03 PM   #65 
  - Why am I so often drawn to these scatological analogies.  truedelphi   Aug-12-07 12:09 AM   #69 
  - kick nt  OnceUponTimeOnTheNet   Aug-11-07 06:13 PM   #66 
  - Junk bond II  Broke Dad   Aug-11-07 06:49 PM   #67 
     - A couple of answers and clarifications  HamdenRice   Aug-12-07 10:04 AM   #72 
  - kick. nt  OnceUponTimeOnTheNet   Aug-11-07 09:21 PM   #68 
  - k/r nt  fed-up   Aug-12-07 06:57 AM   #70 
  - K&R  Junkdrawer   Aug-12-07 07:53 AM   #71 
  - Terrific thread!  amandabeech   Aug-12-07 11:30 AM   #73 
  - Here is what I think is next  HamdenRice   Aug-12-07 12:08 PM   #76 
  - I worked for a trading desk that did 3-party REPOS in the late 80s  48percenter   Aug-12-07 11:56 AM   #74 
  - This is a great example of the nut & bolts things that fell apart in liquidity crisis  HamdenRice   Aug-12-07 12:04 PM   #75 
     - So, the "touchiness" that has been reported concerning Alt-A's  amandabeech   Aug-12-07 01:29 PM   #78 
  - That Sunday , That Summer...  Karenina   Aug-12-07 12:45 PM   #77 

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