This piece was generally good, but there were two significant errors in the chart near the top. Fannie and Freddie did not guarantee subprime. They dabbled in some Alt-A guarantees, but did not go further. Also where you said that that originators "create structured products backed by subprime mortgages and retain senior tranches on their balance sheets." Actually, the opposite of that happened... they sell seniors and mezzanine, and keep the juniors and equity. They keep the most risky parts, because typically they can't be sold. They sell the safe parts so that they can have more cash to originate more loans.
Hi David, thank you for you comment. I used many sources to put this chart together, and I am pretty confident it is accurate. With regard to Fannie and Freddie's involvement with Subprime, these are two (but not the only) sources used.
With regard to the retention of specific tranches, my guess is that these are anecdotal examples. I am sure different financial firms retained different tranches. The senior tranches, however, could be far more problematic because many were highly rated when they shouldn't have been.
This piece was generally good, but there were two significant errors in the chart near the top. Fannie and Freddie did not guarantee subprime. They dabbled in some Alt-A guarantees, but did not go further. Also where you said that that originators "create structured products backed by subprime mortgages and retain senior tranches on their balance sheets." Actually, the opposite of that happened... they sell seniors and mezzanine, and keep the juniors and equity. They keep the most risky parts, because typically they can't be sold. They sell the safe parts so that they can have more cash to originate more loans.
Hi David, thank you for you comment. I used many sources to put this chart together, and I am pretty confident it is accurate. With regard to Fannie and Freddie's involvement with Subprime, these are two (but not the only) sources used.
https://ciaotest.cc.columbia.edu/pbei/cato/0021652/f_0021652_17915.pdf
https://www.govinfo.gov/content/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf
With regard to the retention of specific tranches, my guess is that these are anecdotal examples. I am sure different financial firms retained different tranches. The senior tranches, however, could be far more problematic because many were highly rated when they shouldn't have been.