Let me simplify for your simple brain. I’m fully aware that the average life of an RMBS WAS 5-6 years. The question is WHY that it is. You seem to suggest some baseless insidious plot that if a borrower has not refinanced in 5 years the lender will seek to repossess a borrower to ensure a five year paydown in the RMBS and thus, a sham mortgage contract exists. That is patently ridiculous and shows you have a very crude and ill-informed understanding of how securitisation works. Notice I said WAS. Now the weighted average lives of RMBS will be significantly longer if lending doesn’t return to previous levels. The weighted average life was driven by largely by prepayment rates i.e., what proportion of borrowers voluntarily prepay. Up until the start of the financial crisis, default rates were almost insignificant. Given average prepayment rates that we saw during the housing boom of 30-50% a pool of mortgages amortised very quickly in size which meant that 4 or 5 years in, the pool of mortgages was small enough to trigger the originator’s ability to call the transaction. And they did call those transactions. So what about that 10% of the pool that was left after 4 or 5 years? What happened to them? Did they get repossessed? See how nonsensical your argument is The deals were CALLED, which means those borrowers that did not refinance still had their mortgage, and not only that, but the originator sold that mortgage into a new securitisation. By your warped logic, there is no one that has been with the same lender for 15 years whose loan has been previously been securitised. And what would happen if an originator did not call the transaction? Instead of being paid in 5 years, the bonds would probably not be paid for 10 years or longer, so it is by definition the fact that an originator called a deal that a deal paid off in 5 years, not because of some absurd conspiratorial repossession strategy for borrowers who did not refinance. As far as the SPV, you clearly do not know what you are talking about here. The SPV is a braindead entity. It is purely a passive vehicle and it has to be structured that way because if it is an actively managed entity, it may jeopardise its status as a bankruptcy remote entity and it also may not qualify for the appropriate accounting treatment. You should really do more homework before you start spouting misinformation.

You are incorrect re: this 5 year sham mortgage you are suggesting. Securitisations have historically had a weighted average life of a few years largely due to prepayment rates. Non-conforming mortgages just a few years ago had exceptionally high prepayment rates 30% to 50% (peak). Prepayment rates now are around 5%. Anyone owning subprime paper now is prepared to hold for a significantly longer period because these types of mortgage products no longer exist and prepayment rates cannot justifiably be expected to reach levels of a few years ago. You’re also failing to take into account that the reason these deals pay down in a relatively short time period is also due to the fact that the deals are called by the originator. An originator can call a transaction once the collateral balance is 10% of the original balance (known as a clean-up call option) and that means the originator owns the mortgages once again. Why do they do this? Because as the portfolio amortises to, it becomes more and more expensive to service the transaction and the economics tilt in favour of calling the deal versus paying out the high fixed costs of servicing the bonds. The mortgages that are called at the clean up call date are usually recycled and resecuritised. You also fail to realise that repossessions are not in the interest of an investor. Loss severities on repossessions can easily be 40-50%. In the U.S., loss severities reached as high as 70%. Who takes that loss? It’s the investor, assuming the loss is not covered by excess margin on the collateral and credit enhancement. Also, an originator is not going to have a particularly easy time selling new securitised bonds to investors if they had a historically high repossession rate on previous deals as it’s evidence of either poor lending criteria, servicing, and significantly higher risk. So your theory, frankly, does not hold water.

And thanks to the posters above.

If you believe that investors did not know what they were buying, you don't understand the market. Here's an example: Unassociated Document From the Risk Factors section... And here in another transaction, you find this paragraph in the risk factors section of a preliminary prospectus (from early 2007): If this document is a Prospectus Supplement, do not delete this paragraph Guess what? Investors still bought the deal, which punches a hole in your argument that investors did not know what they were getting themselves into. Maybe they didn't appreciate the severity of the downturn/market collapse, but they certainly knew what they were buying. Investors were drawn to higher risk mortgages because the securitised bonds carried a higher yield than standard mortgage securitisations. Additionally, they overly relied on rating agency opinions to give them comfort notwithstanding the higher risk. In essence, they didn't do the appropriate credit analysis and outsourced it to a third party in exchange for higher returns. You keep harping on this '5 year' point. Please provide a source, because that is not correct. The mortgage backed securities market was traditionally a buy and hold market, it was not a market where these instruments were traded freely (except until AFTER the financial crisis when investors were trying to sell everything they owned). Investors traditionally held these instruments till the deal paid down on its own. So this idea you have that these were sold as 5 year investments is incorrect. If you're erroneously referring to the weighted average life section of a prospectus, see below from the Citi prospectus. The above can't be clearer that the weighted average life of the notes is UNCERTAIN.

JonCris, you have your facts wrong. It's not that securitisation was "designed to fail". The SEC alleges these synthetic securities were designed to fail. But that's not even the basis of the SEC complaint. They are really alleging that there was a failure to disclose the involvement of John Paulson in the deal. I could rattle on about this case, but I'll leave it at that. Securitisation does have a valid purpose and central banks including the Bank of England have bought enormous amounts of mortgage backed securities (the BoE bought over £200 billion in mortgage backed securities last year) to maintain a minimum level of liquidity and lending in the market. I grant you the fact that many mortgages should never have been made, and banks were irresponsible in making them. This doesn't negate the value of securitisation. "The fact that these derivatives are meant to default means the 'investment' (your property) has to be realized within 5 years hence if the derivative/bond becomes unsaleable, (as they have) your 25 year mortgage is a sham";. Again, you are wrong. I'm not sure where you are coming up "realized within 5 years". I worked in sales/trading at a major bank selling mortgage backed securities, so I do have a very good guess as to where you derived that erroneous information. The prospectus of a transaction often refers to the 'weighted average life' of the notes. And often you will see that this weighted average life is around 4 to 5 years. Key word there AVERAGE. There's no guarantee the notes will pay off in 5 years. It's based on a prepayment rate assumption that may or may not be true. The LEGAL FINAL maturity of the bonds is usually after 2040 in most cases. An investor assumes the risk that the loans prepay more slowly than any prepayment assumption dictates and in worst case, at the legal final maturity date. An investor can't demand his money back if he hasn't received his money back within 5 years. That's nonsense.