Junk Mortgages 101

A Fortune Magazine article (appearing on CNNMoney.com) provides a pretty detailed breakdown of how one particular mortgage pool containing $494 million of junk residential second mortgages has fared. This pool of mortgages was put together by the Wall Street investment banking firm, Goldman Sachs, who then sold interests in this pool to investors (certificate holders). The article begins with the following excerpt:

• It's getting hard to wrap your brain around subprime mortgages, Wall Street's fancy name for junk home loans. There's so much subprime stuff floating around - more than $1.5 trillion of loans, maybe $200 billion of losses, thousands of families facing foreclosure, umpteen politicians yapping - that it's like the federal budget: It's just too big to be understandable.

• So let's reduce this macro story to human scale. Meet GSAMP Trust 2006-S3, a $494 million drop in the junk-mortgage bucket, part of the more than half-a-trillion dollars of mortgage-backed securities issued last year. We found this issue by asking mortgage mavens to pick the worst deal they knew of that had been floated by a top-tier firm - and this one's pretty bad.

This story may not be for everyone. But if you're curious to know how, up until recently, it could be that practically every breathing human being capable of signing their name could qualify for a home mortgage, irrespective of bad credit, lack of cash, etc., see Junk mortgages under the microscope (A close-up of one deal shows how subprime mortgages went bad, says Fortune's Allan Sloan) (if link expires, try here).