Subprime lending

High yield mortgages were not confined to the first time home buyers among the urban poor, but also extended to speculative real estate investments made by many in the American upper class. As home prices continue to fall and interest payments continue to rise, it is possible that consumer spending may see a precipitous decline, sparking an all-out recession. NOT

Subprime loans are usually securitized in traunches. This involves hierarchy of principal and collateral. It is by class. The bottom traunch that may be 10% of the package does not get 10% of every house... it gets the last 10% of the value of the collateral after the top bondholders have been serviced. This is why this stuff is toxic, its called first loss. The AAA traunches are still viable, its the AA-NR traunches which are fast becoming absolutely worthless. If the income stream stops being paid in the form of interest on the mortgage, and the principal is worth .90 on the notional value of the securtized loan, and you only have the rights on the bottom 10% of the principal... guess what... its worthless. So paying .75 for something worth 0.00 is not a good investment. You also have to consider the 20 year bull market in housing is now over and the fundamental assumption that these homes will all return to value is ridiculous.

Recent articles in the WSJ suggest that high yield mortgage originations peaked sometime in 2006, indicating that a further surge in defaults may still be on the horizon.