Foreign Investment in Subprime Home Loans

The last paragraph suggests the extent of foreign participation.

Whitehouse, Mark. 2006. “As Home Owners Face Strains, Market Bets on Loan Defaults: New Derivatives Link Fates of Investors and Borrowers in Vast ‘Subprime’ Sector.” Wall Street Journal (30 October): p. A 1.

“Over the past decade, though, a convergence of factors has emboldened banks to lend where they wouldn’t before. For one, the development of the Internet and advances in computing technology have made it much easier and cheaper to process and package new loans …. And robust demand from investors — both in the U.S. and abroad — has given banks a big incentive to lend, because they can easily turn around and resell the loans in the form of bonds, reaping a tidy profit.”
“As a result, both the volume and variety of subprime loans have boomed. Since the beginning of 2002, banks and specialized lenders such as ACC Capital Holdings Corp.’s Ameriquest Mortgage Co., New Century Financial Corp., and H&R Block Inc.’s Option One Mortgage Corp. have made some $2.2 trillion in loans. That is more than five times the amount in the preceding five-year period, and includes a growing share of “affordability” products such as “piggyback,” “interest-only” and “no-doc” loans. These products, respectively, allow borrowers to avoid a down payment, make extra-low payments in a loan’s early years, and state their income without supporting documentation. Subprime loans’ actual interest rates are typically much higher than those on more traditional “prime” loans.”

“Foreign investors have played a big role in making money available. Analyst Mike Youngblood at investment bank Friedman, Billings, Ramsey & Co. estimates foreigners snapped up about a third of the $2 trillion in subprime-backed bonds issued since the beginning of 2002, often through investment vehicles known as collateralized debt obligations, or CDOs. These divvy up pools of bonds into slices with different levels of risk and return.”

1 comment so far

  1. FredS on

    Very nice article. I really learned a lot.

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