Subprime Crisis: The Role of Off Balance Sheet Entities

http://www.informedtrades.com
The first lesson in a three part mini course on intermediate topics relating to the subprime financial crisis. In this lesson we cover the basics of what are off balance sheet entities?

Category:

Education

Tags:

• mortgage
• housepricecrash
• subprime
• sub-prime
• cdo
• crash
• offbalancesheet
• stockmarket
• financial

[pauper101]

ahhh icc, many thanks dave.

[InformedTrades]

Hi Pauper101, Thanks for the comment and for watching. Best Regards, Dave

[loosechangeexposed]

good job explaining the mess, i think we can sum it up with one 5 letter word GREED

[dondido81]

so actualy what problems have arisen from the use and development of off-balance sheet entities - the video doesn't analyse those problems at all

[InformedTrades]

I understand it the investment portion of the debt was separated from the servicing rights portion. So in other words the entity that was billing the mortgage borrower and therefore knew which mortgage went with what was separated from the hedge fund or other entity that bought a part of the mortgage pool. The mortgages in that pool were all supposed to be of the same quality so the investor didn't care about the individual loans just the overall quality of the loan pool.

[whythebailout]

So, the investors actually know exactly which homes they own? If a securities package is "slices" how does an investor understand what they own?

[InformedTrades]

They were selling them to other banks, hedge funds, pension funds, insurance companies basically anyone who was large enough to invest in them. I don't think many people really understood what they were buying however. The houses still belong to the mortgage holder but the mortgage belongs to whomever bought the debt. Best Regards, Dave

[whythebailout]

Question, who were they sellling these packages of debt to and how much information do these buyers have about what they bought? Who do these houses really belong to once their debt is packaged up into these security packages and sold?

[chasleo]

In partial response to your last question/answer - I think from a psychological standpoint anything which has the word 'off' (as in 'off-balance') sounds a bit 'off' to begin with... I'm sure your answers are just as valid, but I'm also sure this naming convention doesn't help matters either lol.

[InformedTrades]

paid a low interest rate on and then taking the money that they borrowed by selling debt and buying these pools of mortgages whihc were made up of longer term debt that was less financially stable and therefore paid a higher interest rate. So for example they would borrow money at 3% and buy securities which paid 8%, earning them just as an example 5% a year from the difference. Hope that helps, Dave