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Domino
bends
In the traditional course of events loan taken for purchase of homes will be
served by the creditor (typically Bank) until the entire loan would not be
paid. But since about 2000, more and more private creditors began to sell most
of their Bad Credit Mortgage to investment banks. And those transformed the credit in bonds provided by the payment of interest on mortgages, and used them as an
instrument of partial credit large investors (such as direct investment funds),
which in turn are used loans from investment banks in implementing a variety of
transactions, especially transactions acquisitions .
Today, only one out of five mortgage loans retained by the issuing
organization. The rest are sold and the money from the sale goes to fund new Loans. In addition, the new owners received and the interest on mortgages. Itis this change in the housing loan industry - an easy sell mortgages - has made
some lenders and brokers less attentive towards high-credit. Indeed, the risks
of borrowing, in the end, moving to the new owners of Remortgages.
Most of the mortgages on American Mortgages was acquired by private investment
banks and other financial sector players. Mortgages together in pools, the
value of which reaches billions of dollars. These pools are available to
special financial institutions - trust companies, which, in fact, are released
on bail bonds Mortgages. Investors buy the bonds to finance its operations. Therisks of Mortgages bonds within the pool are estimated by various agencies, suchas Moody's or Standard & Poor's. Bonds belonging to a trust, a series of
"AAA" are considered to be the most reliable, but bringing the lowest
income. This is followed by a more risky bonds "AA", then
"A", then "BBB". Last believed to be the most risky, but
also brings the highest income.
Where lies dog
Since then the fun begins: Investment Bank has the right to establish and, of
course, creates a new trust under a new pool of bond, which includes only bonds
with the highest risk from the previous pool / trust (this may be not only the
most high-yield bonds, but a mixture of bonds with varying degrees of risk).
Risks of new securities - collateralized mortgage obligations (collateralized
debt obligation - CDO) is also undergoing evaluation, assessment of the initial
pool of strangers - "AAA", "AA", etc., and many of them
have the highest reliability rating, despite the fact that established on the
basis of high-bonds. Do I need to say that this procedure - on the basis of the
establishment of CDO CDO -- can be repeated again and again.
When secured Bad Credits obligations offered to investors, some of them do nothave full risk analysis of these securities, and rely on mathematical models of
credit risk rating agencies or opinion. The latter is often in a situation of
conflict of interest: Their work is funded by the same investment banks, so
they are trying to conduct their evaluation in a manner that, warning of the
potential risks did not deter investors from CDO
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