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Yael Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Aug-10-07 06:11 PM
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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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