Word: mortgagee
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It's a self-fulfilling panic, one that really needs to be nipped in the bud. At banks serving retail customers, it is automatically nipped these days by federal deposit insurance. Fretful depositors have still lined up at branches of the bank arm of troubled mortgage lender Countrywide, but there...
For other investments, though, the old rules apply. If you're worried about the soundness of the mortgage securities you've bought or the corporate loans you've made or the money-market funds you've invested in, it's entirely rational to pull out your money if you can...
And even if you don't take out a second mortgage, you can still fantasize about what the house is worth. Fantasies of real estate prices have long been a staple of middle-class conversation. These days you can go to the Web and get a specific number.
To further complicate the picture, some firms create new "structured finance" products, called collateralized debt obligations, from pieces of other mortgage securities. These new bonds are re-rated, creating illusion of safety even though the top-rated bonds may include very risky original loans. Last year nearly $500 billion in...
At its core, the entire process is based on using borrowed money (home mortgages) as collateral to borrow more money (mortgage-backed securities) to borrow yet more money (CDOs), and hoping the payment chain doesn't break. Once home-mortgage defaults rise, the whole system can unravel.