Fortune has an excellent article about subprime mortgages, with a detailed analysis of a specific $494 million mortgage-backed security (MBS) issued by Goldman Sachs (GSAMP Trust 2006-S3) in 2006 backed by second-mortgages, probably typical of many other MBSs issued by Goldman Sachs, Merrill-Lynch, and other investment banks. Here are some details of the GSAMP Trust-2006 S3 MBS:
Number of individual second-mortgages in Goldman Sachs' GSAMP Trust 2006-S3 MBS: 8,274
Average equity that the second-mortgage borrowers had in their homes: 0.71%
Average loan-to-value of the issue's borrowers: 99.29%
Percentage of loans originated in California: More than 33%
Percent of loans that were no-documentation or low-documentation: 58%
Number of tranches created in the MBS: 13
Number of tranches that were originally investment-grade: 10 (see chart above)
Percent of the MBS originally rated investment-grade: 68%
Number of tranches currently investment-grade: 3
Number of tranches currently in default: 6
Moody's projection of Moody's projection of loans that would default: 10%
Actual number of loans in default in September 2007: 18%
Read the article for more details, it's fascinating.
Bottom Line: Given that most of the original borrowers had no equity in their homes, the only way this story could have turned out positive is if home prices had continued to appreciate. It's also amazing and surprising that Moody's and and S&P could have rated 68% of the issue investment grade.