A mortgage lender, commercial bank, or specialized firm will group together many loans (from the "primary mortgage market"[1]) and sell grouped loans known as collateralized mortgage obligations (CMOs) or mortgage-backed securities (MBS) to investors such as pension funds, insurance companies and hedge funds.
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.
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.