San Diego Housing Market News and Analysis
Submitted by Rich Toscano on March 6, 2007 - 9:53am
Confused by the alphabet soup of mortgage- and credit derivative-related acronyms? Seek comfort in this concise and simple explanation of the securitization process, courtsey of The Economist:
Nice work, Brits. How about another paragraph for good measure:
Makes sense. The problem is that the CDO builders employ mathematical models to decide how much risk can safely be transferred from the (so-rated) AAA tranches down to the lower-rated tranches. And these models apparently aren't so great. For instance, they give lots of points to diversification: but should diversifying across multiple subprime mortgages from, say, Los Angeles, San Diego, and Orange County really be all that comforting?
At the end, the models have to make assumptions about how much home prices will rise and how many people will default. It's abundantly clear that Wall Street analysts have to a great degree overestimated the former and underestimated the latter. It doesn't seem like we should expect expect any different from the Wall Street nerds who crank the constant stream of subprime CDOs.
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