SlatteryPod

How in the world were these bundled up “subprime” mortgages passed off as being low-risk? That is one thing I couldn’t understand about this whole disaster.

This article, What the ‘Subprime’ Mess Is Really About, offered a possible explanation:

In truth, lenders have been systematically concealing the market value of this paper through a fairly simple and universal manipulation of the foreclosure process: when a property is foreclosed and “publicly” auctioned, the lender itself bids in the amount it claims to be owed at the auction, thus insuring that there is never a loss on the loan itself, since the loan is always “paid in full” at the auction.

When it is the successful bidder – as it almost always is – the lender then winds up owning the property. When the property is finally sold by the lender, there is normally a loss; but technically, that is not a loss on the loan itself. That does not damage the value of the original “paper.”

In this way mortgage paper and its many derivatives can be and have been marketed as very “safe” investments, providing a “good return” with “no risk of loss.” But of course there is no such thing. There is a risk of loss; it has just been hidden.