Expert: Terrence Cullen - 10/18/2011

Question
Hi, I'm taking an introductory economics class, and I was wondering if you could clarify something for me (for some reason, no amount of Google- and Wikipedia-perusing could): What is a "bad" mortgage? And why/how do central federal banks buy them? Thanks!

Answer
A bad mortgage is one whose either the underwriting was flawed due to an improper appraisal, the credit ratios are incorrect, and/or a combination of factors have resulted in a non-performing mortgage. The federal banks will buy single or pooled mortgages in order at a discount that reflects the current value of the property, thus freeing up cash flow for local banks so they can operate and stay in business. Good Luck TC