Subprime mortgage problems are much in the news these days. Some subprime mortgages originate with standard underwriting and documentation procedures. They are subprime because the borrowers’ credit quality is poor, the loan-to-value ratio is high, or for some other reason that impairs creditworthiness. Other subprime categories are ‘low doc’, ‘no doc’, and ’pure schlock’, which means that the documentation and underwriting of the mortgages are substandard, nonexistent, or potentially fraudulent.
Since many subprime mortgages get securitized at least once before reaching investors, those who purchased securitized products like CMO, ABS, and CBO instruments will likely experience adverse subprime mortgage effects in their portfolios before long.