You are not currently logged in.
Access JSTOR through your library or other institution:
If You Use a Screen ReaderThis content is available through Read Online (Free) program, which relies on page scans. Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Tumbling Tower of Babel: Subprime Securitization and the Credit Crisis
Bruce I. Jacobs
Financial Analysts Journal
Vol. 65, No. 2 (Mar. - Apr., 2009), pp. 17-30
Published by: CFA Institute
Stable URL: http://www.jstor.org/stable/40390349
Page Count: 14
You can always find the topics here!Topics: Mortgage loans, Investment risk, Subprime loans, Subprime mortgages, Lenders, Investors, Finance, Prices, Credit insurance, Securitization
Were these topics helpful?See somethings inaccurate? Let us know!
Select the topics that are inaccurate.
Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Preview not available
The credit crisis reflects the collapse of a tower of structured finance products based on subprime mortgage loans. These instruments—RMBSs, CDOs, SIVs, and CDSs—shifted the risk of mortgage lending, especially the default risk, from one party to another, until many lost sight of the real risks of the underlying loans. But when housing-price appreciation reversed, many subprime borrowers, having made only negligible down payments, owed more on their mortgages than their houses were worth. These borrowers exercised the put options in their mortgages, and defaults rose beyond the expectations priced into mortgage rates, RMBS yields, and CDS premiums. The downside risk of housing-market prices was shifted to lenders, and losses, magnified by vast leverage, spread up the tower of structured instruments to CDO investors and CDS sellers. The real risk of subprime mortgage investing became apparent, blowing up financial firms and, in turn, the economy.
Financial Analysts Journal © 2009 CFA Institute