The MBS were divided into tiers only when the most senior tier had paid out in full would the next tier begin to pay out and so on. The top few tiers, most senior debt, were almost certain to pay in full, and was sold at face value. The bottom tier, most junior debt was basically worthless total junk, unlikely to pay anything and was kept by the loan originator. The second most junior debt was sold at a discount as it was likely to pay most, but not all, of face value.
And for the securities based directly on the mortgages this was fine. The senior debt was sold at 100% to people who wanted no risk. The junior debt was kept as it was toxic waste. And the second most junior was sold to people who had a bit of an appetite for risk.
Then someone had the bright idea of taking the second most junior MBS and repeating the process. Creating collateralised debt obligations (CDO). And then taking the second most junior tier of those and doing it again, and again, and again, and again.
Unfortunately the default risk on the underlying mortgages had been underestimated by a few percent so the second most junior debt was significantly riskier than they thought. So after a few iterations the senior CDOs were toxic junk. Realising that sparked the 2008 crisis.
Simple MBS, which simply pool a large number of mortgages distributing the risk evenly work fine. Structured MBS work OK. The problem was the structured CDO after a few iterations werte so far removed from the underlying mortgages that they were more or less impossible to value adequetly.
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