Thursday
Jul122007
Video explains mortgage backed securities
Thursday, July 12, 2007 at 03:51AM This CNBC video shows how mortgage backed securities are sliced into tranches by order of losses.
Watch and it's all crystal clear.
Hat tip, patrick.net
Reader Comments (4)
Very good conceptual explanation. These days many people are talking about ABX Indexes but I was not able to find any good explanation, the index ABX-HE-BBB- 07-1 is down 45%, what does it mean?
ArtS
Explanation on Market Ticker forum
I forgot to add that investors buy protection against default on their mortgage backed securities. The cost of this insurance is measured by the index.
ABX is Asset Backed securites indeX
.HE is Home Equity, These are home equity loans.
BBB is the rating of the debt
07-1 refers to the time, where 06-1 was the first semi-annual issue.
This is important, but I've never heard this mentioned anywhere:
The insurance purchased on bonds REPLACES mortgage insurance premiums. PMI, private mortgage insurance, was paid by any borrower with less than 20% equity, and it was expensive. It added 5% - 10% (?) to my mortgage payment during times I had it. The lender charged it as part of the mortgage payment.
When 80/20 loans were first came out, you could use the 20% loophole. By getting your 20% loan from another lender, you now had 20% downpayment and could get out of paying PMI. The PMI companies have lost a ton of market share by this strategy.
Now the lenders are so blatant, that you can get the entire 100% from the same lender, but still as two different loans so they can sell them separately to Wall Street. But the lender still needs insurance.
The cost of insurance has been shifted from the homeowner to the investor. Ultimately, the investor holds all the risk of the loan.
I guess you look at who pays for the insurance against default.
Maybe the homeowners is not the one stuck holding the bag after all. The one paying the insurance is the one trying to protect something, so maybe it's the investor who owns the MBS and CDO. The house as collateral is not good enough, is it, or else why would you need insurance?
Very useful, thank you very much.
ArtS