Subprime Mortgage Lending For Dummies

A recent article in The Motley Fool provided the following analysis of the subprime mortgage lending mechanics that has left the mortgage and real estate market mired in the current quagmire:

• "Sure, it's easy enough to see the problem now. You only need to follow the money trail for what passed as a viable business model for a few years: Crummy loan broker handed money to bad credit risk (often with ginned-up financials). Loan originator held nose, got compliant appraiser to OK the inflated price, then flipped loan to Very Clever Men on Wall Street.


• Very Clever Men bought toxic-waste loans, chopped them into bits, recombined them into tranches of varying yields -- differentiated by risk -- and sold these, now marked with disturbingly sanguine credit ratings, to eager bagholders across the world who were hungry for yield and oblivious to the hidden time bombs within. Along the way, marking mortgage "securities" to market, booking illusory profits on unpaid interest from option ARMs, taking inadequate reserves, and other accounting hocus pocus helped many companies in the food chain post record "profits."


• It was a perfect perpetual motion machine, until it stopped swirling. When non-performing loans and foreclosure rates climbed, the apparatus started to grind, smoke, and hiss."

For more, see Housing Collapse Squishes Bear.