Tumbling Tower of Babel : Subprime Securitization and the Credit Crisis

Bruce I. Jacobs --In 2007, about 40 percent of subprime mortgage exposure—50 percent if government-sponsored Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Association) are included—was held by U.S. leveraged financial institutions, mostly commercial and investment banks and hedge funds (Greenlaw,Hatzius, Kashyap, and Shin 2008). --The LTV ratio of the average subprime mortgage issued that year 2006 was nearly 86 percent (Demyanyk and Van Hemert 2008). --2007. In April, New Century Financial Corporation, the second-largest subprime lender in 2006, succumbed to borrower defaults—one of many such lenders to disappear. In June, two Bear Stearns hedge funds failed, brought down by their investments in subprime CDOs—especially toxic waste tranches; one of the funds was leveraged by more than 21-to-1 (Kelly and Ng 2007).