Were they being negligent in their due diligence or simply winking and looking the other way? This whole problem seems to be self-induced by the lenders who are now asking for you and me to bail them out.
I think this is more like the junk bond bubble of the 1980’s. By the time a mortgage note portfolio reaches the remortgage company level and available to major investment banks, normally it is safe to assume the portfolio has been vetted. Like junk bond bubble, many of these notes were suppose to be backed by the value of the real estate property. If the subprime causes the housing prices to drop below the value of the mortgage even for owners who have gotten a conventional mortgage, the portfolio value also takes a hit on the good notes. I don’t know if you remembered the junk bond bubble, where investors pooled their money to buy a good company, and then went to the bank to borrow money against the assets of the company to buy another company and repeat the process until the investors own a huge number of companies each financed by a loan against the company. It became a equity pyramid scheme which collapsed when one of the companies within the multi layered loan scheme suffered during an economic down turn. Like the subprime scheme, many investment banks and hedge funds owned these loan notes which became worthless or “junk” when the pyramid collapsed.