powayseller, I will also be interested in tickets’ response. I know there are infinite ways to construct derivatives to underlying securities, including ones that act like mortgage insurance. What I can’t understand is how there would be sufficient return from the security to allow returns from all the tranches from some of these mortgage products, unless the risk is (to me) being underpriced. I’d also like a referral to a site that talks about rating factors for mbs. Does no-doc originating status affect the rating? What’s the differential for a (junior) purchase second? Do recourse and non-recourse loans carry different risk factors, and when this is a legal issue did it affect the price of mortages in the relevant jurisdictions? What kind of bundling is being allowed in AAA and AA mortgages? Does this mean that low-risk borrowers are subsidizing higher risk borrowers?
In addition to questions of personal investment: if the reversal becomes as severe as pessimists believe, where the money is lost (and by whom) will dictate the shape of the government bailout, if any, and it would be useful to anticipate that.
