The secondary mortgage market was intended to provide a new source of capital for the market when the traditional source in one market—such as a Savings and loan association (S&L) or "thrift" in the United States—was unable to. It also was hoped to be more efficient than the old localized market for funds which might have a shortage or surplus depending on the location.[3] In theory, the risk of default on individual loans was greatly reduced by this aggregation process, such that even high-risk individual loans could be treated as part of an AAA-risk (safest possible) investment.
On the other hand, mortgage securitization undid "the connection between borrowers and lenders", such that mortgage originators no longer had a direct incentive to make sure the borrower could pay the loan. While historically in the US, fewer than 2% of people lost their homes to foreclosure; rates were far higher during the Subprime mortgage crisis.[4]Delinquencies, defaults, and decreased real estate values could make CDOs difficult to evaluate. This happened to BNP Paribas in August, 2007, causing the central banks to intervene with liquidity.
^Definition of 'Primary Mortgage Market'
"The market where borrowers and mortgage originators come together to negotiate terms and effectuate mortgage transaction ..."