During the recession in 2008, investors in mortgage-backed securities (MBS) experienced significant losses as a result of the subprime mortgage crisis. Many homeowners were unable to make their mortgage payments, leading to high rates of default and foreclosure, and a sharp decline in the value of MBS.
Investors in MBS generally receive income from two sources: the interest payments made by homeowners on their mortgages, and the principal payments made when homeowners sell their homes or refinance their mortgages. However, during the recession, the high rates of default and foreclosure led to a decline in the value of the underlying mortgages, which in turn caused the value of MBS to decline. This resulted in reduced income and significant losses for investors.
In some cases, the issuers of MBS were also accused of misrepresenting the quality of the mortgages that were included in the securities, leading to legal disputes and settlements with investors.
The exact percentage of mortgages that were in default varied depending on the specific market and time period, but it is estimated that approximately 8 million homeowners in the United States went into foreclosure between 2007 and 2010.
One widely cited statistic is that by 2008, approximately 25% of all mortgages in the United States were considered subprime or otherwise high-risk.
It’s impossible to know for sure because of the lack of transparency into these types of investments. Many borrowers could have qualified for a different type of loan, a 30 year loan, but were sold adjustable rate loans that were part of a subprime pool.
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