What is Mortgage-backed Security?

To illustrate the securitization process, we assume that, in Wall Street, Merrill Lynch this type of institution holding the value of 1,000,000,000 U.S. dollars of sub-mortgage loans. These loans will be packaged as securities products have to be involved in the rating agencies. Such as Moody's rating of the company's extensive analysis, the decision of the entire mortgage pool of quality and performance. Their ratings help investors understand the risks of buying these products.

Securitization product that contains a different part or share. Financial terms from the point of view, each "Chuangqi" on behalf of the securities lending support to the part of the risk. When the AAA rating from the highest level down to the lowest level of the rights and interests ②, the risk increases, but the expected rate of return will increase.

Moody's loan pools audited to assess the result is that 80% of the securities for the AAA level, while only 20% of the rights and interests of the AA. This is often referred to as priority - sub-structure, which means that the minimum or sub-Chuangqi before the High Priority or Chuangqi loss of the debt service. It can be said, AAA-class investors get priority for payment, followed by AA level, and so on. AAA said the purchase of securities class, the entire pool of loans, 20% of the loans will suffer losses, after the AAA level credit will be adversely affected. In order to protect high-grade securities, low-grade securities will bear the initial loss, as in chess king to protect the soldiers.

The following description is more complex. Securities have been put together, dismembered, the formation of a pot of integration of a variety of investment vehicles hodgepodge - Tam mortgage bonds , debt securities and credit guarantee bonds, All of which are scattered in different channels of credit risk. When some of the debt secured bonds are a number of other debt securities as part of its assets to support, mortgages to be further split. In this chapter we will look back at the end of the debt secured bonds.

Since the beginning of the mortgage has been unable to identify the original features, there is a need to judge the quality of these assets is almost impossible. From this perspective, to think and see - with cooking utensils processing 10 different vegetables, until they made it look like soup. If a person does not taste This soup pot and bring them to identify their raw materials - just let him rely on his eyes, then you sure this pot mixture of curiosity so that he can only guess, what are the things inside.

To buy these securities investment institutions are faced with the similar problems. Many people think that such investment vehicles to confuse people by nature means that they bought the fund managers do not know what they are buying. That is why the rating agencies in this process plays a vital role in the life and death. Not an objective analysis of the rating agencies, investment agencies that will not be able to buy these products, the risk of investment.

Why simple mortgage repayment of funds to be Anatomy of a variety of investment options into power? In the 1980s, Salomon Brothers and Drexel Burnham a company like that, if the mortgage was split, they will be more valuable. This is very much like a sniper enterprises, with the purchase of low-cost business, and then they break up, the last block the sale. All of the fragments with a total value of Canada as a whole is greater than the original value.