I could go into a million different scenarios about the current state of the mortgage business and why and how it has transpired but I want to pick out one specifically that I read about the other day. Of course the buzz now is how mortgage brokers have originated a bunch of bad loans and this has caused lenders and the people that they sell their loans to on Wall Street to lose a bunch of money - IS THAT SO?
In the article I read, the author had picked out one particular portfolio of loans that was bundled and sold on Wall Street, to track. This particular bundle, owned by Goldman Sachs, was $494 million in size and divided into 13 different slices, or tranches, rated from A-1 (the safest) to X (the riskiest). Without getting too detailed, the riskiest part of the portfolio started to implode because the borrowers were not making their payments and the security started losing money. This started a chain reaction in the whole portfolio that began to work its way towards the higher (safer) rated tranches. In turn, the ratings companies began to downgrade the entire portfolio, and what looked like a relatively safe portfolio in the beginning was rapidly turning to junk. In the meantime, Goldman Sachs shorted its position in the portfolio (and many others) and bet on the fact that their value would fall. Well, it did, and Goldman Sachs made more money by shorting their positions in these securities than they lost when the value of the portfolio went down. So, I ask you-who is really “losing” money on Wall Street?
Craig Pollard is a mortgage professional and owner of Texas Mortgage Team. He specializes in the Dallas Fort Worth area and is a frequent voice on Texas Home Central’s blog. Craig can be reached at CPollard@Texasmt.com or 972-317-9900
This entry was posted on Thursday, November 1st, 2007 at 10:21 am and is filed under Money Matters. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.