standard and poors, moodys, and fitch all have newsletters on their websites that discuss MBS ratings. No doc definitely changes the risk status. I don’t know about recourse status. But my guess is that that shows up in servicing prices. One thing I didn’t’ go into, in part because I’m a little hazy on it myself, is recoveries from defaulted loans. Not sure what you mean about “bundling” but I don’t see any obvious reason for subsidies to flow between low and high risk borrowers.
MBS is sliced and diced into tranches in thousands of different ways. I don’t know if this is still true, but at one time the Z tranche in the subprime world was fairly small and usually held by the originator, who treated it as more or less a lottery ticket (it probably will pay next to nothing, but if times are really good ….). Don’t know if this is still the case, or if Z tranches are getting sold now. The big loser if things go south in the way of a usual cycle is the mezzanine tranche holder, and the insurer. If things go way south, then the holders of the senior tranches get hit. The $64 Billion question is “who holds all these mezzanine tranches?” No one seems to know for sure, but everyone seems to think it’s hedge funds. Probably only the hedge funds and the investment banks know for sure.
Just like no one seems to know who owns this stuff, no one seems to know what kind of return they are getting. But people have made a lot of money for decades on junk bonds. If you get a big enough interest rate you can suck up a lot of losses.
