Mortgage-backed securities II

[helloworld0714]

I just want to clarify, the investment bank creates new corporation/ entity? what are example of this newly created corporations?

[rond02kg]

who are some of these "special purpose entities" you speak of?

[chocoboblue99]

The math and the model looks fun to play around with until someone defaults.

Then, a few more defaults and then there's a domino effect and everyone has a sad face now. :(

[tcg4111]

just got one question and hopefully you can answer it soon enough for it to help...

why does the INVESTMENT BANK (green bank) make up a corporation which sells shares letting investors bank off the interest and principle payment as well? and therefore making only 100 M (in this case), when, if they kept the rights to the mortage payments to themselves, theyd eventually be making 2 billion dollars (in this case)? provided the investmEnt bank had enough money to buy the rights from the LOCAL BANK

[kweezyyy]

@tcg4111 it's just a matter of the investment banks pushing the risk off their own plates. once IB's sell all the "corporation" shares, it doesn't matter as much to the IB if people default on their mortgage payments and the corporation's cash flow dries up

[01agni1]

@tcg4111 The 2 billion dollars are cashflows over 10 years.Hence they are not comparable to 100 M made now.To understand this further go to the concept of time value of money.

[kannu12341]

Hats off to Creater of that movies.....awesome Explanation with simple examples.......:) Thanks a lot

[RebelHQ]

very clear,

great stuff :]

[doublek321]

Weren't securitized mortgages traded on the open market? If so, it seems strange to me that they would be since isn't there an upper limit to how much they should be able to go up? In this example, even if all the people actually pay their mortgages, they only have to pay 7% interest. Therefore, there's an upper limit on the income stream. I'm wondering if these things ever traded above their potential worth (and if so - why)

[prakashenator]

where does the FNMA, GNMA, FHLMC comes into play?

[jaggernat]

nice and clear.thanks.

[CardinalRaker]

@spectrum0590 they actually had a BBC documentary that showed how it can be more beneficial to rent instead own.

[spectrum0590]

It is important to own a home rather than renting. It is a long term investment compare if you prefer to rent. It's a waste of money.

[joskoning]

Thanks, Wikipedia made no sense to me about this, as usual.

[JasonRox88]

The reason why Sal is so successful at teaching because he knows his topics.

I believe the education system in the US/Canada is failing mainly because so many teachers fail to know their own topic. The focus is largely on teaching methods which in my opinion is useless without a proper understanding of the topic. I have seen easily hundreds (former teaching assistant) of students go into teaching and are CLUELESS to what they teach. They are motivated and great people but they are CLUELESS.

[TopBreh]

@honest 4truth

i fink the investment banks set up the special purpose vehicles/entities (spv/spe) so they cud get the loans off their balance sheets.

in this video he says investment banks may have done this because they are not in the business of dealing with mortgage loans however i rekon that they knew a number of these loans were very very risky and so transferred this risk onto shareholders, mutual funds, hedge funds and pension funds etc.

[itsbenyboy1]

thank you very much

[ifginc]

Get easy home finance from Integrated Financial Group,Inc, your mortgage bankers.

[amalmansy]

thank you very much :)

[smokenfly514]

If you're entitled to 110$ a year in the mentioned case, why would you pay 110$ for that right? This makes no sense

[isisqueenafrika]

The crooks behind lenders, such as WMC Mortgage, need to be in jail!!!!!!!!!!!

[ZakBrownrigg123]

absolutely phenomenal explanation of a subject that is often left very confusing to laymen

[gredangeo]

wait a second, with a system like this, could a homeowner buy a share into his own mortgage? Essentially paying himself, but with the bank as the middle man reaping most of the profit? F***ing bankers!

[hannahunney]

So the only way for the corporation to stay in business is high turnover in the housing business? Right?

[strac90]

love your videos dude. I'm studying this kind of stuff but in Australia so some of it's a bit different but most of its the same and your videos have been a great help, so thank you! Just wondering if you have any plans in the future to do a video on fixed vs. floating exchange rates? If so that would be just perfect :)

[sisip123]

I dont need a commerce degree I can just watch this :)

[andykala1000]

dude, effing awesome :D love it.. I'm writing a thesis for my Swedish university on the financial crisis, and hear about this morgage backed securities and have never understood the meaning, especially since there is no direct translation to swedish :D but now it so much more clear :D BIG UPS MAN!

[thegoonist]

but in this case wouldnt the first bank lose money? since it doesnt earn interest (it sold the loans to the I-bank) and has to pay those people who deposit $ in it interest annually?

[urvish1789]

Okay bt responding to TML the NPV of the project i.e. purchasing a share will be -ve @10% disc.y will sumone purchase it...??

[tml337]

Why would the investor slash new shareholder pay $1,100 up front to only get $1,100 over time? I'm gonna assume you meant that they pay a lot less than that but that the investment bank that created the corporation still makes more than what they spent.

[MsMcwill]

@tml337

They pay $1100 up front to get $100/year

for 10 years. So they get a total of $2000

paid back at the end of the 10 years.

($1000 principle + $100/yr * 10 yr interest

payments). This is appealing to pension

funds or retirees bc they get a steady

stream of interest payments.

[SuchisLifeIA]

continued.. who made the extra layer and stimulated the purchases, are the ones who should be bailed out. Hmm.. do you have lessons on the bail out plans and the medical overhaul?

[SuchisLifeIA]

So.. the person in the red is the person who went to buy the house. He also purchases those stocks for his retirement, and he is the one who loses his job. Since he is losing at both ends, he kind of changes the easy money scene for those with their secure securities. Without those taking out the home loans and buying the stocks disappear from the market because they have no job. Ok.. thinking thoughts. I'll go back to listening. I'm waiting to hear why in this framework the large companies

[CBossyful]

Since the investors are buying loans, its a type of bond.

[TomekLeeChan]

So this "shares" are stock or bonds?

[akshayswaroop]

Amazing!!

[socomplete]

It sure is amazing, the banks are the ones who win with these mortgage back securities. The people loose because they owe that bank regardless if they loose they job or not. I want to open a bank... LOL :-)

[guccianaa]

well done

[honolulutradewind]

Who allowed the Banks to sell their right to the investment bankers? Who manipulated or changed the law/rules/ regulations? Unbelivable. Unlimted greed. super presentation.

Who( Entity) is in charge of the rules and regulation of the banks?

[tml337]

@honolulutradewind

- GrammLeachBliley Act 1999

[honolulutradewind]

Who allowed the Banks to sell these right to the investment bankers?

Obviously there was a law or rules and regulations, who broke all these for their greed. Unbelievable.

thank you for your presentation, superb!

[bananaminge]

superb presentation

[kolomgorov]

Thanks so much for this series.  I've been wondering what was at the bottom of this whole mess for a while now.

[MiriZemel]

Great presentation -- so helpful.

[2fuck2shit2]

What is the Key disfavors by Having Your Mortgage

realmortgagepaid.blogspot. com

[DCady452]

K110, if you are referring to the bank that 1st made your loan when you ask about the "small commercial bank", by selling its loans it is deferring the risk to the purchaser of these loans. Remember in this vid and a previous one that the small commercial bank receives a fee for acquiring the loan (I think 5000 is used) it would receive 5M (5000X1000) on virtually no risk (which has all been deferred with the sale of the mortgages). Therefore the bank makes a basically risk-free 5m profit.

[Kikkan110]

It makes 5m risk free, but it could have made much more with some risk in the long run (according to this model) if it would keep its loans. The irony is that if banks starts to behave this way the banks who operates more traditional (not sell their loans) would be stuck with all the downside if (when) the housing market tanks. So a bank has every incentive to get rid of housing loans and make short term profits and thus further increase the incentive to make rotten loans.

[Kikkan110]

Why would the small commercial bank sell its loans when it would earn much more by keeping them and collect the payment stream from the borrowers?

[catharthic]

i think it is because they are getting cash (lots of it) every time they try this model...then they can replicate it again and gain more cash in one short period of time rather than over the course of 10 years even if it would have been more.

someone correct me if i am wrong.

[Lunatic4ever]

yeah,your the man :D

[ILoveGoodFellas]

god damn it, you need a show on CNBC, i swear to god

[pagalmadman1]

u know how to present very very well.......thnx again

[MrMortgage1]

cool

[MrMortgage1]

A good mortgage is like a work of art.

mortgageartist. com

[romish12]

i have a question!! when you buy get a loan for a house you actually paying only the interest? or the principle also?

[nanassaki]

Thanks for updating the video, it's very useful but i'm super headache with the picture

[high5flyer]

The commercial bank (white) does this to be able to make a loan and get fees. However, once they make the loan they no longer have as much in their deposits to make more loans to others. The commercial banks gets that money back (principal) by selling the rights to the loans cash stream (monthly payments) to an Investment Bank (green). The investment bank then sells those same rights to individual investors (blue). They pocket in this example $100 million just for being an intermediary.

[hakker2002]

lol that is why we r in this financial crisis all thx to ABS, MBS, CDO and Credit difoult swaps CDS, do not learn this or i will be very conserned in US banking system in the future

[TheMomalek]

You did a fine job. Keep it up.

[mohamadnaeem]

Excellent Work Man...

I was looking for the video wahich show in detail, What Mortgage is?

Thanks for making and uploading this video.............

[1pinoyprince]

This is perfect and ideal coz everybody gets the business opportunity and the right to creat wealth by sharing the risks thru secured loans...the only problem is if the secured loan or the house being mortgage was wrongly appraised or over valued. And the borrowers after taking out the loans have no intention to redeem the house that was over valued. Or just like what recently happened when everybody lost their jobs...then, the unthinkable will happen.

[fakhon]

the 10% is the interest, and the 1B is the actual principal. Usually the monthly repayments will include an interest component and a principal component. The presenter has just assumed that the principal is paid right at the very end instead - makes things a bit easier.

[CenseSay]

im only up to 3:09 in the vid right now....

So are u saying that the corporation is going to get $2 billion after 10 years or $1.1 billion (in total)

[ewertoza]

I don't understand that too. They pay 10% a year, that's $100, ok. But last year they are going to pay the same amount of money as they borrowed 10 years ago?

[zvonkyzg]

Correct. These 10% years are just the interests, summing up to 1B in 10 years - which is just as much the bank gave to you so the bank would not make any profit. So you actually give the bank 1B in interest + the 1B loan itself = 2B. Its a quite high interest rate :P

[paulremote]

The sames amount, that's right (It is a simplified version of a real loan). Each borrower ends up paying $2 million after 10 years. That means that the corporation receives $2 billion after 10 years.

[surfinguy69]

Really good presentation ! 2 thumbs up chief !

[U2BHistory]

Still good on the explanations.

U2BHistory

[seppukuhierarchy]

so the investors are exposed to the risk that the houses lose their values and therefore when people default on their mortgage they get less than they paid for, even with the interest payments?

[mannyfeseha]

thehelpfund.blogspot

[MoroccoFriendofUSA]

There are 3 Billion people around the world who live in dire hunger and disease. What about them? How can we help them? I am sorry, but being 30 years old and ALREADY owning a house is not a responsible decision. Many people are just getting started at the age of 30. People ought to face the consequence of their decisions. Many were working hard while many were enjoying their Home Equity Line of Credit.

[chikna14850]

awesome job!!!

[robrown1]

Google UNIFIEDMARKETS

[melnick1985]

GOD BLESS YOU, I LOVE YOU.

[marginallymental]

Salman, you NEVER confuse me. You have a truly precious gift--you speak in a matter-of=fact tone, and present topics simply and incrementally. I'm constantly saying to myself, "Duh! Of COURSE that's it--why did it seem so difficult?" when I watch your videos. Accept our thanks for your hard work.

[antisbr]

amazing job...confusing topic and i think you explained it terrificly!! thank you for the help. your doing a terrific job

[andym01]

very well explained!!

thanks so much!!

[JJFinance831]

Could you give an example of a special purpose entity? Do you know any special purpose entity created by Bear Sterns?

[goosebump1988]

Thank you so much..ur videos are really helpful!

[malzlistens]

Way too many repetitions. Could improve by thinking before speaking, then speaking could slow down as the words and phrases get more meaning.

[88think]

How about you be grateful for the movies this guy is so generous to be making for us on his free time?

[L1John]

okay. somewhat more confusing. your are doing this on the fly. you should set it up first. still good stuff though. isn't it true though that the original mortgage owners (house buyers) still make their payments to the original bank and they just funnel the money along? still sitting here laughing. you know, the risk is passed along until some british, irish or east german banks get stuck with the "hot potato". it's their own damn fault. this capitalism, thank god.

[honest4truth]

What is that special purpose entity ?

If its a corp isnt it owned by the shareholders and needs a more stable continues income than a 10 year mortgage interest payments, and why wouldnt the investment bank sell those shares themselves ?, a well established bank has a better reputation than a new corp that might be considered to be selling risky junk bonds due to its "new"ness, sorry if i ask silly question, i am only starting my 2nd year in finances