 Quote:
Originally Posted by barbarus
In many cases the bank's only participation was to originate the loan which was quickly sold off, chopped into pieces called tranches(pardon my French) by Wall Street and ultimately bought by "patsies" such as pension funds.
No one really knows who owns a specific loan in some cases.
There is little doubt who will ultimately be the loser and pay the price though.  |
Actually they know exactly who owns it... it is the trust.... but since you are right in that it is cut up to a lot of different people, it is hard for the trustee to change the rules... because if you do then someone gets more and someone else gets less of the money that comes in....
If you own the IO, then you HOPE that the loan continues forever and you make out great... but if you have the PO, then you might want to have the house foreclosed and then sold off to get as much as you can... because if you let the person pay 'only' interest... then you get nothing and the PV is horrible....
That is one of the big problems with a fix... it does not hit all the 'owners' the same.... and why is the banks getting hit hard? Because they owned the 'residual'... that is the money that would have been left over if everything went perfect and all loans got paid off at the original terms... these are the most volatile tranches... so they can go to zero from a big number quickly...
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