LO 36.1: Explain the subprim e m ortgage credit securitization process in the

LO 36.1: Explain the subprim e m ortgage credit securitization process in the United States.
The subprime securitization process in the United States involves several different parties beginning with the borrowing needs of the home buyer. The borrower (mortgagor) applies for a mortgage and, conditional on the due diligence of the lender, is extended a loan with the residence serving as collateral. Borrowers range in quality from prime (i.e., strong credit history) to Alt-A (i.e., borrowers with good credit but more aggressive underwriting standards) to subprime (i.e., borrowers with poor credit history). Lenders sell a significant portion of their loans to a third-party (special purpose vehicle) and receive cash in return. Prime loans that meet conforming standards are sold to government sponsored enterprises (GSEs). The remaining loans are increasingly being sold and taken off the originators balance sheet. Approximately 73% of newly originated subprime mortgages were securitized in 2003 and 2006.
F r i c t i o n s i n S u b p r i m e M o r t g a g e S e c u r i t i z a t i o n