How Subprime Home Loans Become Risky Investments　(2/2)

Subprime lenders often depend on credit to make the loans. Once processed, the loan is usually sold to an investment bank. Loans with similar levels of risk are grouped together and then sold to investors worldwide as mortgage-backed securities. The higher the risk, the higher the return.

The Government National Mortgage Association, known as Ginnie Mae, and two other organizations known as Fannie Mae and Freddie Mac produce most mortgage-backed securities. But investment banks have increased their share, led by Lehman Brothers. Last year, it processed more than fifty billion dollars in securities backed by subprime mortgages.

Being able to sell their loans offers mortgage lenders a way to raise money to make new loans. But being able to spread their risk can also be seen as an invitation to make bad loans.

Last week, federal agencies released the final version of a statement on subprime lending. It provides guidance to lenders to make sure borrowers are able to pay back mortgages with adjustable interest rates. The aim is to avoid payment shock as the rates increase, often after a low starting rate. The agencies also warn against lending activities that harm the interests of homeowners.