Issue No: 21
Moneta
July 2017
SECURITIZATION
relaxing loan standards on housing
loans since demand for mortgage loans
was at an all-time high.
A higher rate of return, a diverse
portfolio, investment in a pool of
high-quality assets, isolation of credit
risk from the parent entity - sounds
like a good deal? Then why did
Securitization get a bad reputation? They used securitization to cash out
the mortgages and pushed the default
risk onto the investors. Obviously, they
knew people would default on the
loans, and the prices of houses kept
appreciating rapidly. Eventually, they
foreclosed houses that soared in value.
Let us go back to 2007. Once the
United States entered the 2007
Great Recession, subprime loans
turned into toxic loans as the
borrowers started defaulting their
loans in record numbers. In order to
safeguard
themselves
from
foreclosures, Banks and Investors
created a Credit Flow that rapidly
appreciated
house
prices-
by Banks convinced homeowners into
accepting
ARMs
(adjusted
rate
mortgages), wherein the mortgage
payment would change with the (yet to
explode) interest rates. This conspiracy
between Investment banks and credit-
rating agencies, such as Standard &
Poor and Moody's worked. Thus, the
average Joe was fooled.
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