mortgage

If mortgage bonds are corporate bonds guaranteed then how the subprime bubble happen?

I'm trying to understand and be safe bonds that mortgage bonds are secured bonds, if that is the case, but by default, the investor must obtain the prinicipal back.Can someone give an explanation this works.

I'll try to explain this clearly, because it can be confusing: Persona Z buy a house with a mortgage of Bank Z. Bank ZZ person making mortgage and packages it with many other mortgages. Z Bank then sold the mortgages to the company the company issues bonds R. R with the mortgages as collateral. Indeed, they are saying, "Although our corporate credit is not enough to convince you to buy our bonds, we are backing up these mortgages with additional protection. "Because that the link is safe, they can offer a lower coupon rate (the link is less risky). Person A, seeing this great buy bonds plenty of them. Now, interest rates rise, and Person Z-adjustable case only jumbo loan interest from $ 800/month to $ 3500/month. Person Z can not pay and defaults on the loan. Bonds purchased Person A has had its security breached by someone Z. They are still supported by the householders themselves, but since everyone is defaulting property values are plummeting. Worse, the mortgage company is incurring huge costs to buy the house at an auction and it's in their books until they can sell it and recover the money. The bonds issued by the company R are much more risky now. To offset the additional risk, investors refuse to buy bonds of the company R until you can get a steep discount. This means that the company will not increase R as much money as they need. If the company does not R raises a lot of money, probably not going to buy mortgages from lenders Person Z more. If the lender is unable to sell mortgages in the secondary market, they have no money to to lend. Without much money to lend, the price of money rises. If money is more expensive, other people have difficulty borrowing money. If everyone has problems lending money, none can afford to buy foreclosed homes and the downward spiral continues.

Mortgage-Backed Securities I

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