Mortgage-Backed Securities (MBS) Explained in One Minute: Did We Learn Our Lesson?
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- เผยแพร่เมื่อ 10 ก.ย. 2024
- Mortgage-Backed Securities (or MBS, to use the abbreviated version) have been made famous or rather infamous by the Great Recession, which they have caused to a significant degree.
But what are these Mortgage-Backed Securities anyway and why should you care about them in 2020 and beyond?
As recent price action among many asset classes made clear, we are currently living in challenging times and as such, perhaps it wouldn't be the worst idea in the word to allocate a minute (heh) to learning from the financial follies of the past.
This video will hopefully enable you to do just that, since it explains what Mortgage-Backed Securities are all about and why they are so dangerous to begin with.
Please note that times have changed and that history doesn't necessarily have to repeat itself. However, it oftentimes does tend to rhyme and those who meaningfully understand the MBS phenomenon will without a doubt easily find common denominators when comparing the Great Recession to future calamities.
Enlightenment can start with a one minute explanation, believe it or not :)
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Like Einstein said- if one can’t explain a complicated thing in a simple form, one hasn’t really grabbed the concept themself ..
Indeed! :)
It amazes me how something so complicated can be explained so simply. Thank you so much.
Thank YOU for taking the time to say something nice, people always underestimate how big of a difference this makes!
That's the thing, it's not really complicated. The investment banks and government make it sound as technical as possible so the common person doesn't understand it. It's clearly by design.
They do it on purpose so that the average person don’t want to even 🤬with it. But it’s really not that complicated and honestly a big ass scam.
@@CuriousAndCuriouser1865 Actually no, it really IS very complicated.
That's because it wasn't explained, and it isn't simple.
This a great video that gets right to the point. It's much better than those 20 minute videos that cant seem to explain things in a clear way. 👍
Really happy you feel that way Sam, thanks a lot for dropping by!
I’m doing a finance major. But my lecturers haven’t bothered to include any proper definitions or even remote conceptual explanations around this EXTREMELY crucial concept of MBS. Thank you very much for clearing a big cobweb of confusion and doubt in my head. I’ve had a doubt about this MBS concept since the very first time I read about it in the Global Financial Crisis etc. and now in my lectures!
I'm here to serve :)
Quick note: I will be publishing a series of videos through which I try to help those who are scared in light of the current depressing price action among many asset classes. This one revolves around trying to learn from the past and the common denominator when it comes to all of them will be this: reason rather than emotion needs to prevail, so let's try to take a step back and see things in a rational/lucid manner. I cannot promise this attitude will help you make perfect decisions, but I'm convinced they'll be multiple orders of magnitude better than the emotional decisions the average investor tends to make.
What about a video on supply side recession seeing as we could be entering one?
Will do my best to create a logical "puzzle" over the next few weeks/months :)
Thanks SO much! This makes a lot of sense, the simple 1-2 minute videos with easy-to-understand examples always helps me way more than the complicated 20 minute videos that get way too specific. This is a great starting point.
Thanks a lot Scott :)
I was having a hard time understanding MBS and you explained it so easily and under 2 mins. Thank you!
Music to my ears, appreciate the kind words and the fact that the one minute concept is validated. Especially when it comes to more complex terms :)
One Minute Economics needs your help! Please give me a minute (heh) of your time by watching the following video if you find the channel useful, literally anyone can help (either financially or by spreading the word about my work): th-cam.com/video/io04ckq1X1M/w-d-xo.html
The MBS racket is still churning out product. Recently did a mortgage. Asked specifically if our mortgage was going to be sold to another company or could we trust we would continue to work with the local office. They assured us it wouldn't be sold. Well, son-of-a-gun, a month after signing and beginning our payments we get a letter notifying a different company has bought our mortgage and we will now need to send our payments to them.
Sorry they didn't keep their word :(
Of course, on the other hand, there's nothing wrong with the idea of selling mortgages in and of itself. The main question is HOW it is done, more specifically the risk management and I'd say ultimately ethics thereof
I couldn’t understand how it worked just by reading the explanations from the finance blogs but this videos just made it clear.
Awesome, glad to hear that Amanda!
Amazing!
One can be an intellect, but suck at teaching
but in your case, you are both intellectual and a great teacher! So, thank you for teaching us well and saving our time!
When reading your comment, I thought you'd be getting ready to say I fail in both cases for a moment there :)
If you liked this video, I think you'll love The Age of Anomaly, my Wall Street Journal and USA Today best-selling book about preparing for financial calamities (whatever they may involve). You can buy it over at:
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OMG ! He made it so simple within 2 minutes he explains such a complicated thing where Big short takes 2 hours about recession.
Very helpful video. The FED are the primary investors of MBS. Now I see how they earn their interest/dividends to generate money
Glad you found the video helpful :)
do you think that institutional investors that purchased mortgage-backed securities contain subprime mortgages were following reasonable investment guidelines?
This reminds me of a Mark Cuban anecdote he shared on this blog many years ago, about the time he went public. As tends to happen, he and his partner ended up meeting institutional investors all over the place so as to convince them to buy... serious people, big money, suits, the whole enchilada. Initially, they thought these serious super-investors would grill them with difficult questions, to they prepared thoroughly, only to realize said investors were completely and utterly clueless. So clueless that as an insider joke, they intentionally included certain sentences of utter nonsense in their presentation to see if people noticed. Nobody noticed, and everyone pledged the maximum they could because it was a "dot-com" company (this happened in the dot-com bubble days). The moral of the story, as it also pertains to your question, would be this IMO: don't over-estimate institutional investors, most had no idea they were oftentimes essentially buying garbage :(
Something so amazing... The way you taught. It is made really much easy .
Thank you SO much for the kind words :)
Thank you for the excellent training. I am from Iran. I am watching your video and thank you for your good work. Try to increase the short but practical training to increase the level of awareness.❤💯
Congrats on showing this much interest in your education, very happy to hear you find my videos useful :)
You, my friend, just earned a subscriber for saving my time
Welcome to the community! :)
The explanation makes perfect sense but what doesn’t make sense is why are the investors willing to take on potentially garbage loans?
Many reasons, that range from investors not perceiving these loans as dangerous to them willfully ignoring risks in an attempt to generate greater yields, to flawed risk assessment models and so on :(
I don’t understand how the SPV has profit by buying the mortgage loan, it still has to pay it back with interest! Also I am wondering who is actually got profit or using the asset itself ?
Woah... I'm thinking about investing in an MBS REITs company and this video just explained not only what would happen to me if people stopped paying their mortgages, but what probably happened to during 07-08.
To get an even better picture of the MBS fiasco back then, I'd also recommend checking out the following video (the term may seem familiar if you've seen The Big Short):
th-cam.com/video/2oyXK-G7GiI/w-d-xo.html
@@OneMinuteEconomics One of my favorite movies.
cool video, getting the Sikh gentleman in the video as an investor was pretty dope. thanks
Thank you! :D
Writing a macro paper. This helped a lot, thanks!
Awesome, happy you found the video useful!
Thank you. Some websites cant explain shit without sounding overly technical or nonsensical!
Fighting the good fight, still on the barricades :)
Perfectly explained...saved lot's of time!!!
Just the type of comment I love reading, thank you! :)
How is the price of MBS calculated when they sold it to the Investment Bank?
What is here selling Dave's loan to investment bank and what is Creating MBS and selling to investers? How does it worth the money where the bank and investors pay out? 🤔
The More I See It The More It Makes Sense, Definitely Doesnt Work The Way I Originally Thought..Good Vid Would Def Like To See How Investors Play Their Part..Esp Moneywise
Happy you found it useful :)
Great video!
Could anyone provide some numbers for context? Let's say Dave wants to borrow $300,000 from Bill's bank. How much money does Bill's bank sell the loan to an investment bank for? and then how exactly does the investment bank make money by bundling the loans together into an MBS for investors to buy? How do they ensure they take in more money from investors to offset the costs they paid for buying all these loans from banks, and finally how are investors supposed to (ideally) make money off of buying these MBS's.
Glad you found it useful Evan! There's no "set in stone" rule, the bottom line is that every step of the way, you have transactions with two parties that thought they are getting a good deal. Bill's bank was happy to say no to additional profits in exchange for making the loan somebody else's problem (the investment bank). The same way, the investment bank was happy to bundle loans and sell them to investors, once again making this time not the loan but the loanS (plural) someone else's problem. Finally, you have investors who believed the risk to reward ratio associated with the Mortgage-Backed Securities they bought makes sense. If people would have kept making their mortgage payments, everyone would have been happy. But from rating agencies to retail investors, let's just say sloppy risk management was the rule... the risk to reward ratio various players envisioned was one seen through rose-colored glasses rather than realistic. Even the quants who worked for top-tier insurance providers shrugged when they were asked what would happen in the event of systemic default problems... practically nobody was willing to give such scenarios serious thought. And when the perfect storm manifested itself... yeah :(
Great video easy to understand. Your instructions are very clear. Thanks!
Thank YOU for the kind words! :)
Now i understand Big short
One word: Excellent!!
Thanks a lot for taking the time to say something nice! :)
Tony is prudent
I have a question. Doesnt the modern bank lose some Money because they lend e.g. 100 to Dave but Receive only 50 from the Investment Bank. So he has a deficit of over 50 because of the additional interest
No you can’t purchase 50% of a mortgage
Great vid btw! Thank you so much 🙏🏼 💯
Thank you. I understood in one minute☺️
Always a pleasure to hear this, thanks :)
Great Explanation. Thank you. 💯
Glad you like it :)
thank you so much for explaining it so clearly and concisely!
You're more than welcome, thank YOU for the kind words :)
Why is this video hating on mortgage brokers? “Dave’s loans” has a lot of skin in the game when they are 100% commission. Not to mention access to multiple banks and lenders to help the borrower shop for the best interest rate. That’s having the best interest in mind of the consumer. Big banks have payroll, building expenses, larger over head and they make up the money on inflated rate sheets.
No hate intended
thank you so much for the amazing explanation! it saves me much time to understand the term:)
You are more than welcome, appreciate the kind words :)
How do investors make money on those packages? Does the loanee pay the investment bank, who pay the investors? Where is the investor's financial gain?
From the payment of the mortgages
@@octabunge If the bank loans 500.000 USD how dont the investors pay the hundreds of potential mortgages worth millions? I don't see the risk factor for the investors. Yeah, the loanee might default but still, the 'original' bank is in millions or do the investors pay the total mortgage sum of millions and eventually get paid an interest of each loan?
@@CivilAviation1 Let's say I lent a person 100$ with 30% interest in a year, so in a year i'll get 130$ but I have a bill to pay today for 15$ (I just lent someone all my money!) and I'm out of cash, so I ask you, hey, would you buy his debt? i'll sell it to you for 115$ and in a year you'll get 130$, so in one year you'll have made 15$, unless that person defaults on their debt, then you're screwed, that's your risk.
The moral hazard comes from the person buying the debt not being well informed about how payable is the debt.
Great discussion guys!
Otto Bun so they only get paid if a default DOES not happen? They are basically selling off the original loan in a package and the risk associated with it and letting the investor play bank with them... which is strange because if an investment bank is big on these kinds of securities then they are going to start assessing loan risk at origination based on the money that they would get back from the investors - which means the bank would have an incentive to take loans at higher risk of default and buy deeper... is that somewhat correct?
This was an amazing video. Thank you so much!
Thank YOU for the kind words :)
Would an investor be fannie mae and freddie mac? Does the original bank that sold the loan get the fees or does the investment bank because dont the borrowers still make payments to their bank?
Thanks!
Once they (the Bank) sells the loan, they *normally* receive a cash for that transaction, so the loan risk is out of their hand, switched to another.
Hello, Question ----
When people stop paying their mortgage, the can bank take their home and sell it at a foreclosure auction. Does any of that money go back to the Investors who purchased the loan from the bank?
Yep, as it's the investors in question who now "own" these loans
Yes, true, they can go after the houses to cover their losses, however, remember what happened during ‘08 - housing bubble and shoddy underwriting - the values were not their when they investors came for them. Also the reason why this time around it’s different - solid underwriting and valuation on properties
ماذا تعني MBS
mbs mortgage backed securities
تعني اوراق مدعومه بالرهن العقاري
حيث هي اختصارات الاحرف
(M)
mortgage
(B)
backed
(S)
securities
I do not work in finance! So could someone explain to me why do banks sell loans and how do companies and investors gain money out of a load 😅 ?
Very well understood, thank you so much 😌
Always super happy to hear this :)
They should have added this 2 minutes long video to the Big Short movie - it would have clarified a lot of things about what exactly happened.
Basically, the CDO is a kind of MBS which the bankers sold to investors - except, like a product, the CDOs were composed of shit mortgages - basically, mortgages which were unlikely to be ever repaid by the borrowers.
The investment banks sold investors shit products - and like when you eat shit food at a restaurant, the entire world economy got a global diarrhea epidemic.
There's always the next popular meltdown movie, maybe it'll be included in that one :) Glad you found the video useful! One remark, a CDO is not a type of MBS but rather the other way around, a MBS is a type of CDO. When you get a chance to, I'd recommend also checking out my CDO animation: th-cam.com/video/2oyXK-G7GiI/w-d-xo.html
this is just awesome!
Thank you :)
So what would cause investors to pay the price? The banks not properly qualifying loans for people who don’t have good credit and default on payments?
Yep, pretty much. Think about it this way: if you lend money to a person you know you will have to collect from over a period of 30 years, you will probably be a lot more careful than if you lend money to a person and sell that loan to an investor :)
@@OneMinuteEconomics I don’t know if the blame falls on the people selling or buying the loans. The investors should do their own research and not just assume.
All parties involved carry blame IMO
"Tony has all the reasons in the world to worry before Tony lends Alice the money"
Tony never lent Alice a penny. In fact Alice had to pay a down payment in hard currency. She got back a 30 year contract. Tony sells this contract and gets the full value of that loan. I do not see what Tony has to worry about.
Hi, thanks for the video. It is really informative and simple however I have a question. why doesn't Bill sell these loans directly to the investors?
Thanks for the kind words! Bill could indeed eliminate the middle man altogether but sometimes doing that is too much of a hassle to be worth it. Additional layers of regulatory red tape, marketing said loans, and so on
lmao you explained this so easily, thank you
I'm here to serve :D
1:00 what did he say?
"1) he gives Dave the loan" :)
@@OneMinuteEconomics Thank you sir :)
Very good content love it ❤️
Really appreciate the kind words Ajay :)
Very good video
Thank you :)
I’m watching The big short
Thanks
Thank YOU for saying something nice :)
Wasn't this process the driving force behind American banks lending money to people who couldn't really pay it back? Packaging up bad debts and selling them off as MBSs to unsuspecting investors?
Yep. Now there's nothing inherently wrong with MBS themselves, they're simply financial products. A tool, if you will. With it all depending how it is used. A sharp blade can be used responsibly by a surgeon to save a life, MBS can be used responsibly to facilitate the flow of credit. The same way, a sharp blade can be used for the worst of purposes by thugs/killers and MBS can be used recklessly as a means of kicking the responsibility can down the road or better stated passing it on to others (responsibility for criminally sub-optimal loans).
what if people doesnt pay mortatge or you short that bond and people dont pay their mortage
If people don't pay their mortgages, short-sellers win... provided of course their counterparty doesn't go belly-up amid all that ensuing chaos :)
@@OneMinuteEconomics but how short sellers win
I know it sounds weird that you can bet against people paying their mortgages... but, well, you can by for example buying Credit Default Swaps. Sure, you can buy them as a so-called hedge to protect yourself against a default (the risk management use case) but nothing is stopping you from purchasing them so as to merely speculate
What are CDOs??
Wanted to recommend my CDO video but noticed that you already commented on it, hope you found it useful, leaving this link so others can check it out: th-cam.com/video/2oyXK-G7GiI/w-d-xo.html
One Minute Economics yeah thanks a lot
Hi, I was wondering why the investors have the most risk?
In the context of this video, think of it as a game of hot potato, with investors (let's say by design) being the ones left in a potentially unpleasant situation: with a hot potato in their hands and nobody to pass it on to :(
As far as I understand, in this case the bank is only a middleman, and by selling those loans the bank already made its money, so they're in the clear. Now it's the investors who have the risk, because if people fail to pay their mortgages they are losing out on money.
@@alyssamarie5377 who were the investors and why did the investment banks take such a hard fall if they were only the “middle man” ?
@@erickburgess4718 because of the inventory they got caught with that went bust
Ans : Bill 01:43
We did not learn the lesson unfortunately
:(
Why do we fall master wayne?
This is a bit dated, can you do it with government like central banks owning the mortgage debt instead?
Believe me, I have haha. Would strongly recommend checking out the following playlist when you get a chance to:
th-cam.com/play/PLhICud5IUwVj5ICDHzrUCMhNuMvHK4kRj.html
money you print put of thin air lol
Ok
This is a gross over-simplifcation that misses so many factors. But that can be expected from one minute lessons.
Feel free to chime in with comments and/or suggestions, nobody's perfect :)
@@OneMinuteEconomics Without trying to sound like a jerk but generally simplifications don't work. That's generally how we get in trouble, for example, in 2008. To give a simplification that a mortgage backed security is a bunch of packaged loans is like saying a doctor cures patients, so everybody can practice medicine. In reality, to understand the basics of an MBS takes at least 3 grad level college courses; and that would barely scratch the surface.
For example, I think you tried to highlight the potential moral hazard of issuing an MBS, which of course is a legitimate concern, but is that the only motivation for issuaning one? What are the alterntives, if any?
What other questions might you consider? The first MBS came about in 1968, but why did everything implode in 2008? What effect did government policy play on the mortgage market and their origination? What was the difference between a mortgage issued by a mortgage house and one issued by a TBTF bank? What's the difference between an agency and a private label, passthrough and a CMO? And for the private labels, what's the difference between a prime vs. Alt-A vs subprime deal structure? Did the AAA rated subprime tranches actually lose money and how much? What did the dissenting opinion for the FCIR report say and what has happened since the crisis? All of that are questions that get very complicated in explanation and certainly can't be explained in a youtube comment.
I get it, I really do and that's the thing: it's impossible to dig that deep in a comment and the same way, it's impossible to do so in one minute. I have played around with the idea of wonking out with a mini-series where we break things down granularly (a GR under the hood series, if you will), but there just isn't that much interest in this, compared to other topics that I haven't yet covered and for which I receive a ton of requests. Things are complicated on my end offline atm, perhaps if I end up going on a publishing spree again I'll figure something out :(
Tony.
Just another high risk, high reward game.
Minimize risk so that won't not be bankrupt
If only it were that straightforward :( Unfortunately, it's not just a high risk, high reward game... it's the perfect one from the perspective of large players. When times are good, bonuses are sky-high and the wealth creation game is at its finest... when however something breaks, it's time to get rescued. Hard to think of a better deal for recipients than the privatization of profits and socialization of losses :(
I won't say high risk since most people do pay their mortgages on time
But yes if the banks are too careless in approving these loans then it might be a little risky
To answer the question, no. No, we did not learn our lesson.
:(
Explained too fast that English medium person can't understand it.
Got carried away, sorry about that :(
Feels like u intended to have Bill wear a straw hat and sandals?
Nope, some things are just randomly chosen by the animator :)
whats the fucking answer
WTF
Thanks SO much! This makes a lot of sense, the simple 1-2 minute videos with easy-to-understand examples always helps me way more than the complicated 20 minute videos that get way too specific. This is a great starting point.
Really glad to hear that Alyssa Marie, thank you! :)