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Subprime lending boom sets the stage

Part 2: Subprime tsunami

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Editors note: Part two of a four-part series on the crisis in subprime mortgage lending looks at how subprime lenders built the originating infrastructure that allowed private-label lenders to overtake government-sponsored enterprises Fannie Mae and Freddie Mac in the secondary mortgage market. (Read Part 1, Part 3 and Part 4.) When economists and historians look back on the turn-of-the-century housing boom, they may conclude that new loan products -- like interest-only loans, payment-option adjustable-rate mortgages, 2-28 hybrids and piggyback mortgages -- were the fuel that stoked it. Many of these nontraditional loans had been marketed to affluent borrowers for years. So how did they end up being marketed to subprime borrowers? At a Jan. 19 seminar for investors in New York City that was also Web cast, Jack McCleary, head of asset-backed security trading for UBS Investment Bank, offered an insider's perspective. In the beginning, McCleary said, subprime mortgage lenders "basic...