Subprime mortgages, there’s an old saw on Wall Street that, in times of panic, money returns to its rightful owners

Tranche Warfare

Who will be left holding the bag as subprime mortgages go bad?

By Dave Mulcahey

The greatest boom in property values since record-keeping began has produced a population more in debt, and with less equity, than before it all got going.

Now that the real estate bubble seems poised to go the way of its dot-com predecessor, a new narrative has taken hold in the business press. Where once reporters breathlessly touted double-digit, year-on-year gains in home prices, they now warn darkly of the “meltdown” underway in the class of exotic mortgages that added so much punch to the party.

After months of dismal reports for the real estate industry—declining sales, rising inventories, softening prices, rising foreclosure rates—the news took a sharp turn for the worse in late June, when the investment bank Bear Stearns shut down two hedge funds whose holdings were laden with securities backed by subprime mortgages.

Suddenly, finance pundits and insiders were speculating about just how far the damage of bad subprime loans would spread. Could it be “contained”? Were more hedge funds on the verge of implosion? Was the debacle about to touch off a system-wide credit crunch?
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