This is not your parents' mortgage market.

A generation ago, banks took on deposits and lent that money to homebuyers who took out 30-year, fixed-rate mortgages. That changed when Wall Street got involved in recent decades. Investment banks provided capital to mortgage companies so they could make the loans, and then bought the loans and bundled them into securities that are sold to investors.


Through the magic of "securitization," the broker, lender and investment bank essentially become fee-collecting middlemen between the borrower and investor. Critics say that the process encouraged riskier loans because each party passes off the mortgage to the next.

Securitization also spurred the rise in the past few years of subprime mortgages for borrowers who have weak credit or modest incomes and are therefore charged higher rates. That translated into higher yields on the securities, a big draw for investors flush with cash. More exotic loans were extended, and for a while it seemed there was a mortgage out there for any borrower.


It worked until a large number of borrowers who took on adjustable-rate mortgages could not make their payments or sell their homes in a slumping market, and landed in foreclosure. Investors shunned the mortgage-backed securities. And the modern home-finance cycle came screeching to a halt.

Experts say securitization is here to stay -- and so are subprime mortgages that opened up credit to a broader swath of Americans. But it will take time for the market to recover.

"It's like having a shark attack," said Guy D. Cecala, president of Inside Mortgage Finance Publications Inc. in Bethesda. "It will take a while to convince people to come back in the water."


Bought more house than they could afford or took out adjustible-rate mortgages as low, teaser rates that later ballooned. In some cases, borrowers did not fully understand -- or were not told -- how high their payments might go.

Many have fallen behind on mortgage payments and lost homes in foreclosure, More foreclosures are ecpected.



Bought mortgage-backed securities, either ignoring the risks or taking the word of rating agencies that assess the quality of securities issued by investment banks. Such agencies have come under fire for underestimating the risks.

Mostly institutional investors such as pension funds and insurance companies have been stung by investment losses and stopped buying the securities, leaving less to be lent to borrowers.


Offered some mortgages with little scrutiny of the borrowers' qualifications, often working through brokers who in some cases deliberately hid a homebuyer's poor credit to close the deal. Lenders then sold the loans to Wall Street.

Dozens of lenders have closed operations, scaled back on the types of loans they are offering or gone bankrupt.



Encouraged lenders to make riskier loans. Extended line of credit to lenders and then bought the mortgages to repackage them into mortgage-backed securities for sale to investors.

Somehave closed subprime loan units and taken losses on investments in mortgage-backed securities.,