Mortgage-backed securities III

[MrSirtomz]

Dude, you are awesome!!! I love these videos....thank you thank you!!

[chocoboblue99]

Who ever didn't invest into that model were the true winners at the end. This looks more like made legal pyramid scheme to me.

[dantheman945]

is this guy a fucking genious or what? does anyone realize HOW MANY EFFING VIDEOS OF KNOWLEDGE HE HAS POSTED?!?!?!?

[BapidBeagle]

Right now I think I'd love to become an investment banker.

[smurfieboo]

@BapidBeagle why don't you day trade and invest in companies on the side?

[BapidBeagle]

@smurfieboo Oh I will at some point it's just I'm 21 and saving up for a car then an apartment. Once I have a "home base" and have established minimalistic budget I plan on taking that money and putting it into investments/business college.

[smurfieboo]

@BapidBeagle If I was you I wouldn't worry too much about the apartment - rather start preparing for how you are going to make money from the next market crash. Start researching companies now that you would like to invest in, start thinking of companies like Dollartree that will do well in a downturn. Good luck hun.

[entertheoctagon]

Where did the 0.5*10% come from? I think you meant to type 0.5*20%? Also, what I meant was that if 20% default and their properties are sold for half price, you receive half of the value of the house. This means you have 80% which are paying interest on their loans, and then 50% of 20% of the value of the houses that were defaulted on. Why is a magical 10% of interest being tacked back on?

I think kahn is using a very simple assumption in that 50% of everything is recovered.

[entertheoctagon]

Unless... Khan meant that when they sell off the house, they provide a 500k mortgage based on the same interest rate. Still, Khan has a good way for laymen to gain a basic understanding of the concepts in these videos. In that regard, thanks Khan!

[entertheoctagon]

I don't think Khan was quite right about the 10% loan recovery if 20% default. If 20% default, then only 80% are paying interest on their loans. If you do recover 50% of a 1 million dollar loan by selling the house, you simply receive 500k. This means the payout at the very end of the 10 years is equal to 900 dollars per share holder. But, they only receive 8% leading up to that point based on the model Khan proposed.

[KoalaBearWarrior]

@entertheoctagon You're over thinking it. If 20% default, then 80% are still paying right? So you have 80% + 0.5*10% = 90% of the 10% each year, so you then earn 9% a year, not 8%.

[ABCInfinit3]

@KoalaBearWarrior The way I interpreted what Khan said was for simplicity he assumes all 20% default in year 1. So they don't pay any of the interest and ends up at a loss of 200m. But since 50% is recovered through selling the houses its only 100m. 800 people still pay their 10% which would be 80m. So in year 1 that is a net loss of 20m. But there are 800 left to pay 10% which would be 80m/year and end up at a net gain of 700m after 10 years. Not sure but thats how I interpreted the situation.

[KoalaBearWarrior]

@ABCInfinit3 No, its a net loss of only 100 million. Remember they have a 50% recovery from the 20 million loss.You have it right in your other post. He is assuming that 50% of the loss will be recovered. So any loss incurred, divide that by half, because you have to remember that they can resell the house and get the proceeds to limit their losses.

[KoalaBearWarrior]

@KoalaBearWarrior Sorry strike the 100 million number. I meant the amount of total interest payable each year. 

[ABCInfinit3]

@KoalaBearWarrior Why is the 50% coming out of the interest payments though? If 200 people default and the bank reclaims all of their 1m houses that would be 200m and then a 50% recovery would mean 100m. Shouldn't the 50% recovery only apply to the principal recovered from the sale of the houses?

[KoalaBearWarrior]

@ABCInfinit3 yes, he's implying that the sales of the houses will cover 50% of the missed interest pmts for the period

[ABCInfinit3]

@KoalaBearWarrior They don't though. When those 200 people default you lose 200m off the principal. If 50% is recovered then you get 100m back so the principal is still only worth 900m. And then add the 10% interest the remaining 800 people are still paying which would be 80m a year.

[DAPATINATOR]

@ABCInfinit3 That is exactly what I came to but I suppose you have no idea when they will default. But it seems to me that if 20% default and %0% is recovered then that is your profit gone. But other than that these videos are brilliantly explained.

[007malikai]

bare minimum expliantion of true bond backed and packaged MBS'

but good for the pleebs

[szapater]

Best explanation I ever heard. Great job! Thank you so much.

[spectrum0590]

This video shows clear information about mortgage. This will surely save people houses for foreclosure.

[MrTaco905]

its over 9000!!!!!!

[MrGradehunter]

Is a MBS a company share of the S.P.E in the legal sense?

[CardinalRaker]

Thanks. Good videos. Bankers, wall streeters, insurance people are bottom feeders

[yuansavvy1]

For institutionally insured - actually profits come from CDS - insurance of the MBS and its derivatives - because you do not need to be the holder of the securities to insure them. But holding the discounted certificates and insuring them for face generates fantastic profits - ala Goldman Sachs Abacus 2007.

[yuansavvy1]

You may try CTSLINK (Wells Fargo) or BAC (old LaSalle). You will find out that the particular traunches - First Loss or B-Piece is not publicly traded - it is privately bid.

Traditionally bonds with coupon higher than prevailing interest rates (market rates) would trade at a premium - this is still the case in senior classes of MBS.

Price moves counter to yields in bond market which MBS is a part of. I understood the question this time.

[yuansavvy1]

Two reasons 1) The best place for fake money is MBS to convert it to securities, 2) The secondary market on MBS certificates is a sham - see if you can get the certificateholders list from REMIC trustees. This also helps reason 1) above. Bloomberg (bond terminal) has access only to certain classes (certificateholders)

[yuansavvy1]

Smokeyfly514 - "why banks loan $1B to only sell them to investors for less (10% defaults)?" - there are two Prospectuses for REMIC trusts (REMICs issue Certificates). The second one (PRO SUPP) that gets funded contains (bogus) loans - those that create the 10% default+ profit. Trust starts with 80-90% in real loans. The private buyer of B-Piece (AKA First Loss) knowingly invests in high-risks for the right as “Controlling Class” to name the "Special Servicer" who will strip the trust for them.

[smokenfly514]

@yuansavvy1 Thanks a lot, that's pretty interesting! But what I meant is why does the secondary market value increase to a non-attainable amount

[smokenfly514]

Can someone please explain to me WHY this guy says - in the 2nd video - that the value of this $1.1B owed to the creditors would be $1.1B ?? It's like loaning money with no interest and risking losing a good part of it. Thanks a lot, I really don't get it

[yuansavvy1]

@smokenfly514 - If you need to know how the Special Servicer steals from investors, borrowers, guarantors and sometime the depositors, I will be glad to explain. This is beyond Khan's Academy. This Khan's PHD program now!

[smokenfly514]

@yuansavvy1 I'm all ears

[ricardopoper]

@smokenfly514 There are fees, interests and maybe higher sell or transaction costs. He made the 1.1B -> 1.1B for simplicity purposes.

[oletty]

Thank you so much for this. I am an engineering techie who has become deeply interested in economics and finance after the 2007-2009 financial crisis. Your videos provide valuable and clear explanations to complicated subjects I am currently reading about.

[theporksicle]

What happens if property values rise in the period between the loan being issued and the debtor defaulting (as you've explained elsewhere usually people don't default when property values are rising so one would have to assume some external reason existed)? So the debtor was loaned $1 million for the house, the house is auctioned off and it fetches a price of $1.5 million- is that extra $500k distributed to everyone or just the top tranche of investors?

[dekes58]

@theporksicle If your house is worth 1.5 mill in that case then you should have no problem getting a "home equity" loan from another one of these greasy loan companies if not the same one. Or you could sell it for 1.5, pay off the mortgage, and walk with the cash

[theporksicle]

@dekes58

I know, I was saying hypothetically what if the person couldn't pay and the house is repossessed and in the intervening period of time between the repossession of the house and the auctioning property values rise dramatically, what would happen to the surplus above the amount the mortgage was issued for? I doubt this situation arises often it was just a hypothetical question.

[dekes58]

@theporksicle Well then, no doubt the bank would pocket that and the "investors" would at best get their 10%

[theporksicle]

@dekes58

I suppose on the one hand that's fair, with one of these bonds you are buying a fixed income asset, you expect to get your X% and no more, its not like a stock with a variable dividend based on performance.

However I think it would only be fair if they put the money aside to make up for any defaults and if there was not enough defaults to use it all up at the end the bank could keep, it of course with banks being banks this would never happen.

[Niehiels]

Are mortgage backed securities completely the same as asset backed securities?

[socomplete]

The question is who can these special purpose entities be? Are these spe's crooks?

[pagalmadman1]

"i don't know" - takia kalaam of sal

[AlbinoRodriguez]

My question is, who owns my loan?

original bank got paid from investment bank.

Investment Bank got paid thru the MBS or investors.

If i default, who has the legal right to foreclose? If the investement bank already got paid?

[occidental88]

I believe that the SPE still maintains ownership of the loan rights because the officers collectively still hold more than 51% of the stock authorized. This is why today we are seeing investment banks that are losing tons of cash through these deals that were top-heavy a few years ago in the housing market. Investors obviously have gone through huge dividend cuts so everyone really loses.

[AlbinoRodriguez]

But how if the SPE is formed 100% from money of the investors. Where did you get that officers hold 51% of the stock authorized? I am interested in learning more about it.

[back2root]

@AlbinoRodriguez

I think in most of the cases the investmentbank holds 100% of the shares, but is issuing cdos...

[back2root]

@AlbinoRodriguez

I think the shareholders of the SPV, because the SPV is the owner of the mortgages

[DaBrit3]

Just a thought: maybe some of the people watching these vids are a little too advanced in their knowledge of the subject. These vids are for novices, like myself. Thanks for all you do, Sal.

[pjblabla]

I would like to ask a question

when a regular bank gives out $1 billion worth of loans it uses fractional reserve banking rules to bring new money into existence - right?

is it that when an investment bank buys these mortgages and sells them further - then existing money (i.e. savings) gets used.

Now, that most of these mortgage backed securities have gone to dirt - so is it that existing money (i.e. money that is no longer debt) got destroyed?

any responses are welcome

[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

[paulremote]

Ideally, borrowers pay 10% per year over 10 years and pay back the total amount at the end. The investment bank receives $2Billion from borrowers.

If 20% default, with the 50% recovery on their properties.

The investment bank will get

$100m from the recovery

$800m from end pay-back

Year : 1 2 3 .... 9 10

Interest $: 80m 80m 80m 80m 80m

That is $800m over 10 years + $800m from the total properties + $100 from the recovery, that makes $1.7Billion, 15%loss??

[paulremote]

My question: In the case where 20% borrower default, there seems to be a 15% loss in Total, why do you mention only a 10% loss?

[apeytube]

Is it because of the 50% recovery rate? 20M of 100M default but 10M is recoverable, so total 10M loss?

[DaBrit3]

Paulremote, I was thinking the same thing about the $2Billion going to the SPE.

[jerry3238]

Terrific

[buckboss1]

Very good stuff. Made easy enough for the common guy to understand. I looked at your other videos but did not see one explaining how our country gets into debt. If we have 13 Trillion as a country in debt, who do we owe? Do we print money or do we issue bonds? What if foreign countries don't want to buy our bonds?

[dpod916]

our currency used to be backed by gold, now it is backed by government treasuries which are basically bonds that the government is obliged to honor, and yes alot of foreign countries own these mainly china. and to you second question if they no longer wish to purchase our treasuries which could very well happen very soon because of our printing billions due to bailouts then we would have a currency collapse and hyper inflation as seen in germany in the 1930s.

[Melville10]

I'm reading When Giants Fall by Michael Panzner. What you are discussing, according to Panzner, is a distinct possibility. Panzner cites that many countries are moving on financially because they have reached the point that America is no longer important to their wealth (e.g. Russia doing deals with Iran and China and omitting the U.S.) Panzner's 2007 book, Financial Armageddon, is frightening in that what he talks about in 07 is happening now.

[futureeconomist]

The notion that the Treasury Department is printing billions of dollars in money is completely FALSE. Just because the media shows money being printed anytime they cover financial news DOESN'T mean the Treasury prints money on a daily basis.

It is imperative you know that the Federal Reserve actually SHREDS $400 million dollars in a SINGLE DAY. Trust me, I have personally been to the Federal Reserve bank and seen $100 notes and $1 notes being shredded and removed from the circulation constan

[pcuimac]

They create giromoney in an account not "real" money. Most of the money today is only a number on a computer harddisk.

[futureeconomist]

In response to bubkboss1:

Believe it or not, $4.2 trillion of the debt is actually owed to the federal government itself. That means it's owed to gov't agencies such as the Federal Reserve and Social Security. This kind of debt, ARGUABLY, doesn't have to be repaid. (Kinda like you paying back yourself).

Secondly, most of the remaining $6.8 trillion is owed to domestic American citizens/corporations. The gov't owes China $1 trillion, which, comparatively isn't bad as saying "China owns us."

[asierra1492]

Public Sector debt is 13 trillion

Private Sector debt is 38 trillion.

[Furiouz7]

thanks

[busrider85]

Sorry 08b x 10=.8b plus .9b initiall =1.7b hence .7b profit on 1 b investment

[kggoh]

Now, not only the default make the problem worst, the asset(house) value went down, eg. 20% of 1b defaulted = 200m worth of asset, the owner r not able to make payment, the bank took their asset and put in on auction, guess what, if the asset value now drop to just 50%, the bank can only recover 100m, ie, it loses not only the interest of 200mx10%, 20m per yr, also the capital is reduced by 100m.

[busrider85]

If 20% default=> .8 b left to pay 10%=> .08 b on a .8b + .1b=.9 b asset now. Hence return on investment = .08b x 10 years plus initial .9 b= .98b => loss of .02 b

[RobinHaryanto]

Very good video. but maybe it's just me, but i think it would be better if you would not do those quiet muttering to yourself, it gets hard to follow after a while. Otherwise, it's a great video, very informative.

[mebyoullc]

excellent overview. thank you.

[heartsofaraway]

Videos are G R E A T , thanks so much!

[haoxinqingleon]

couldn't thank you more. u r blessed

[InformedTrades]

great explanation thanks. Very hard to find good simple information on the subject thanks for taking the time to put it out.

[bmwwilliams]

Good work. Minor comment: with a 20% default rate and 50% recovery that is 10% of the principal gone (not 10% of the interest). It actually wipes out the interest element completely.

[Jehan415]

this is awesome!! is there one on synthethic CDOs?

[Anonymous11235]

Excellent, extremely helpful video. Thanks!