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Just one loan going bad can have a large impact on a securitization, causing some tranches that were paying on schedule to suffer losses or even be wiped out.
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Some investors buy tranches that give them low yields with little chance of loss.
These were also pooled and sliced into tranches that, too often, acquired the AAA stamp.
It was not just the top tranches that got triple-A ratings.
The bottom tranches are risky and pay higher interest, while the tranches that are repaid first are very safe.
Another part of the F.D.I.C. rule limits the number of tranches that can be created in a securitization.
It would redistribute the risks to tranches that bear less risk and a lower interest rate, as well as riskier tranches that offer higher returns.
Mortgage securities, like other packaged products, slice and dice underlying mortgage paper into different segments, or tranches, that investors buy based on what risk they want to assume.
I gently reminded them that they had inventoried toxic waste in BBB rated subprime mortgage tranches that proved worthless within 12 months of issuance.
Further, it is typically these riskier tranches that would include loans to small- and medium-sized enterprises which usually do not have access to other forms of funding such as the corporate bond market.
Local governments lose revenue from recording those changing interests, and the original note often becomes lost in the brisk shuffle of trading and reassigning them to various tranches that back purchases of them from all over the world.
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Justyna Jupowicz-Kozak
CEO of Professional Science Editing for Scientists @ prosciediting.com