An unemployed alcoholic welfare recipient, $36,000 in debt, gets a $103,000 mortgage on her tiny, rickety house, which is probably really worth not even half that amount. The appraiser makes $350. The broker/lender makes $6,000, and an extra $3,000 when they sell the loan to Wells Fargo. Wells Fargo bundles the loan with 4,000 others and sells them to HSBC. HSBC securitizes the bundle to resell it to investors and pays S&P and Moody's ratings services an unknown amount to rate the bundle. Despite 85% of the bundle being "subprime" loans, S&P and Moody's give the bundle their top "triple-A" rating, meaning it is extremely likely the loans will be paid back with interest.
The woman moves out of the house soon after getting the mortgage out of fear it is going to collapse. Her meth-addict son moves in takes over the then $881 monthly payment (APR varies between 9.25% and 15.25%) but stops paying. The house is foreclosed upon. The investors, including pension funds, who had a reasonable expectation of getting their money back based on those ratings, now must divvy up the $15,000 the house sold for at auction. The buyer: neighbors who tore it down fearing it would collapse.
http://online.wsj.com/article/SB123093614987850083.html
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