Mortgage-backed securities II | Finance & Capital Markets | Khan Academy
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- เผยแพร่เมื่อ 29 ส.ค. 2007
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Part II of the introduction to mortgage-backed securities. Created by Sal Khan.
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I can't believe this video was uploaded in 2007. I mean, I thought it must have been done only months ago. This playlist deserves more views.
Right after this video 2008 crisis happened
i didnt understood a thing in 2nd part
@@universalinformation572 bruh
this dude speaks my language of visual learning, thank you i now understand the structure of cmbs loans
What if no one can pay his Morgage... oh.. wait...
What could possibly go wrong?
well that happened in 2008...
Nani??
Lol
2008
The 1st bank makes money from giving out Loans. They charge us Fees on top of those Loans. If we get a $100,000 loan, there might be $2,000 of Fees we need to pay the Bank to make the transaction happen. The fees are separate from the loan.
The more loans the 1st bank can make, the more money they can make on fees. They need the investment banks to buy our loans in order to have the cash to make more $100,000 loans.
That's a great question, I hope that helped.
very imp point stated by you . "The more loans the 1st bank can make, the more money they can make on fees. " Greed starts here ....
Thanks for summarising it.
Thank you!
Omg, that did helped me
And they’re transferring the credit risk of the loans. The investment bank is making a bet on the ability of the borrowers to pay consistently in the future, as well as prevailing interest rates, hoping to have a more valuable pool of loans in the future than they pay for at first.
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!
This actually makes sense.Totally worth watching.happy learning✌
I am not an educated man, but this is the best explanation that helped me understand what an MBS is.
I love the way its explained easily ,simple to understand :)
You're amazing, Sal!
Most people can skip the first video and go directly to 5:43 to get the same information.
I thank you for your time and work on this. It always amazes me what people come up with to screw over the working class.
Thanks so much for this series. I've been wondering what was at the bottom of this whole mess for a while now.
I watched 4 other videos and with this one I actually understand. Thanks!
This video gives a really interesting perspective, an interesting watch. Thanks, National Homebuyers
It was very helpful. Thanks for making the video.
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 :)
Very well explained as always, thanks!
What a great explanation!!!! Thank you so much
Super Useful! Thanks! Hope in the following episodes will find answers like why the create a SPV.
I know your comment is 4 years old but I’m a law student that has taken a course on corporate finance. The Special Purpose Vehicle or Entity is important because it reduces risks from bankruptcy. The SPV has special rules and it cannot actually go bankrupt like normal corporations. If it were to go into what would be bankruptcy, the rules cause it to liquidate instead and the investors get paid. This lowers the risk of the investors losing their initial investment.
Great vids man. Really clears up everything
Thank you so much..ur videos are really helpful!
Very well explained. Thank you!
thank you, Salman! 謝謝！
Great presentation -- so helpful.
You are amazing. Honestly great Job!
Great explanation, it refreshed my knowledge
Great series of videos and Sal is obviously super freakin smart...Very much appreciated. One thing I didnt get too much clarity on tho was - How are the investment banks themselves profitting from people buying the bonds/securities...Is it from general fees that the banks charge the investors to initially setup a portfolio/ or to buy the bonds in general?
I know it’s a year late but from my understanding the investor pays $1100 to secure an income stream of $100 per year per share (one millionth of the $100M in interest paid per year) for ten years, which adds up to $1000, as well as repayment of the principle loan, in this case at the end of ten years. Ultimately their $1100 investment makes them $900 per share so long as no one defaults, since $1000 is a millionth of the principle $1B. The investment bank, however, payed $1B for the rights to own the loans, meaning they make $100 per share issued (since 1B divided by 1M is $1000 and each share is sold for $1100.)
@@deucemane3545 That's awesome! Thx for the reply!
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.
Nice this has helped me understand something for work
You did a fine job. Keep it up.
Hats off to Creater of that movies.....awesome Explanation with simple examples.......:) Thanks a lot
Your confusion is painless...and need that confusion...thanks.
My question is, if enough people don’t pay their loans and the values on those homes go down, do the share values also go down? And is it the investors who lose in this scenario? Or is there some sort of insurance for this similar to the FDIC?
Yes, the value of the shares go down and yes, it's the investors that lose out in this scenario. Although, what happened in 2007-2009, some investment banks also lose out a lot since they were still holding these MBS in their books when people started to defaulting on their mortgages. These investment banks didn't get to offload these MBS to investors.
And yes, there is a sort of insurance that can be taken out for this. It's called Credit Default Swap. A few people, such as John Paulson and Michael Bury profited from the 2007-2009 crisis by buying these CDS. Some investment banks also bought these CDS. Who sold them these CDS? Some other investors who were bullish and AIG the insurance giant.
Yes it’s the investors who take the risk and get hit when defaults or prepayments happen. The borrowers aren’t really hurt by the MBS, they would get foreclosed on either way if they don’t make payments
Amazing!!
Excellent Video!
Amazing. Thank you
nice and clear.thanks.
Excellent Work Man...
I was looking for the video wahich show in detail, What Mortgage is?
Thanks for making and uploading this video.............
This humorous course would burn into my brain.
Great video!
I love these videos. And this was in 2007 omg.
well when they ipo wouldnt the stock get investgated with all that buying pressure or do they do reverse splits to create more shares ?
I think it would be helpful to explain why a commercial bank would loan out 1b dollars just to sell the MBS for a similiar 1b. It is because of time preference, and incursion of risk.
superb presentation
This is so awesome
Thanks!
The entities are trusts, not corporations. They don’t issue shares, they sell bonds on behalf of the trust.
thank you very much :)
Super Video!
the only thing what strikes me is why should any one pay $1100 for a share when the return over the years can be at its maximum $1100 so the value of the company will sustain at the same level by $1,1 bill if the lenders pays their loan without cessation. The only exception I can imagine is that the interest rate is variable. Higher interest = higher return but it also means = higher probability for defaults.
+Noor B looking to your timing i guess it's "the big short" that got you here XD anyway, the reason someone will be paying 1100 $ for a share is that besides the obvious 100$/year interests he would get for 10 years , he would also get the 1000$ at the end of the 10 years. Keep in mind that each "smiling face" will pay 1M$ after paying 100k$/year for interests for the 10 years. So, our shareholder is getting 1000$ of interests payment + 1000$ at the end of the 10 years and that makes 2000$ and a return over the years of 900$ per share. I hope you get it now :)
+BENRYANE Iliass I see what you mean but in my opinion the calculation only works when the ratio between lender and investor is 1 to 100 but in this example the ratio is 1 to 1000 that means the $100k interest payment "from the lender" over the 10 years has to be divided by 1000 "investors" = so it´s +$100 per shareholder. I do not get it where the $1000 interest payment comes from. Thanks!
.... the movie is amazing by the way : D
YOU ARE AMAZZIINNNGGG
Thank you❤
Khan Academy produces educational videos on many, many topics. It's not all one guy doing financial videos.
Excellent explanation! The whole system is so superficial, no wonder it was bound to fail!
Awesome
I dont need a commerce degree I can just watch this :)
Please make a video on prepayment of loan option
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 $2 billion after 10 years.
very nicely explained
well done
yeah,your the man :D
So does it means that SPV encounter more risks?
I wish you would do one on TBA (To be Announced)
continued.. who made the extra layer and stimulated the purchases, are the ones who should be bailed out. Hmm.. do you have lessons on the bail out plans and the medical overhaul?
So the investment bank plans on buying back the shares after a while, after ppl have driven the share price up?
I personally think that Sal is so successful because of his methods too. I agree with you on the fact that a proper understanding of the subject is fundamental but I assure you that teaching methods are very important too. Right now I am an engineering student in Italy and many of my professors know their subject from top to bottom but have no clue on how to trasmit their knowledge to the students. Having also studied in an international school I can tell you that teaching methods are essential.
I wish all traders and investors a very pleasant evening
“If this guy, one in a million, defaults on his loan…then this entity will have that property sold and the cash flow will come back” Man this did not age well AT ALL considering the date of the video
Weren't securitized mortgages traded on the open market? If so, it seems strange to me that they would be since isn't there an upper limit to how much they should be able to go up? In this example, even if all the people actually pay their mortgages, they only have to pay 7% interest. Therefore, there's an upper limit on the income stream. I'm wondering if these things ever traded above their potential worth (and if so - why)
Can the mortgage back securities bevdangerous to the housing market?
I'll bump this if you don't mind :P
I get that the first bank makes money from the fees the investment banks gives it. I get that the investment bank makes .1B$ (a little less, if you count the fees) when it sells the shares. What I don't get is why anyone would buy a 1100$ share if the cash flow will eventually be precisely that, 1100$. Is it actually that people buy shares for let's say 1090$ and then get's an income of 1100$, giving them a 10$ yield/share?
The last step confuses me. Thanks!
They’re getting $100 a year for 10 years and then another $1000 on the last year- so share buyers are paying $1100 per share to receive a total of $2000
@@asimf4505 but then why would the bank give up making $2b total at the end of the ten years if it just held onto the loans?
ubermensch826 because the bank probably took out a loan to buy the $1b in shares off a small principal investment. Moreover, the demand on the market for each of these shares increases the price. (Think of the share as a simply way to get solid return on the investment. A bank is in a position to increase the price of a share which people want. The people will buy a bond at that increased price because it will offer them a return on their investment, and they’re okay with making 7% rather than 8%. )
@@shermanthompson871 dude can u explain it thoroughly again? ı can't understand it my mind fkd upp. How they closed the difference betwen 1.1bil and 2bil
Oh wow, I just got it! You earn 100mil. per year(we started to calculation except principle so not adding it). Meanwhile you sell your shares at 1100 dollars because of your 1.1bil. assets and it makes 1.1bil more income. Totally u got 2.1bil. income and you pay per shareholder 2k at the end of 10 years. So finally 2.1bil-2bil=100million profit. On the other hand, if we had add principle money to calculation in first section we got 100mil per year till 10th month. In 10th month we would take 200mil.--> 9x100k+1x200k=1.1 mil(for 1 debtor). Totally ıt would make 1.1bil+1.1bil=2.2 bil and we would give 2 billions to shareholders. As a result we would make 200 million profit if we would have added capital to debt.
I would like to challenge you in a good way of course. To educate me in how the back monetize the Notes using the individuals personal information on the process of Mortgage back securities. And how people could be untitled to be claim their note and monetize by the process of reconversion. I hope you see my comment.
One Question: In transferring the mortgage from the initial (commercial) bank to investment bank, the initial bank did not make any money on it? the $1B mortgage that it had issued to 1000s of Sals, it gained it back from the investment bank when it transferred the mortgage. But net is zero, so why is the bank doing this type of deal? to transfer liability? or maybe they take fees? but even then they are losing on the 10% or $100M they could be gaining in 10 years. Hope someone clarifies this?
Question: Is the step where a second bank buys the debt necessary? Can't bank one set up the MBS by himself?
gre8 I think commercial banks can't create legal entities and issue stocks, they're in it for the processing fees
I think what gre8 means is, cant the bank just sell it directly to the cooperation directly, instead of selling it to an investment bank first. kind of like cutting out one of the "middle men"
but yeah the mortgage lender may not have the proper licensing to create a legal entity for investing and buying shares the same way a commercial investment bank would.
Matthew Warrenfells Thats precisely the question. Indeed, there may be some bureaucratic mechanism that forces that situation like you said. It would explain it. But other than this legal matter then, there would be no "necessary" reason to have this middle man, right?
gre8 I would think so. Or they maybe just not be interested. I work as a banker at capital one, and I know we keep most of our mortgages. We have a huge investment department, but the securities and other products offered are generally not mortgage related....as far as I know
does the original 1 billion loaned out get paid back to the first bank or to the shareholder of these securities?
great
If your watching the big short and needed this so did I
Why doesn't the investment bank just keep the shares for themselves and profit off of the interest? Why should they sell the shares
The risk is now taken on by the shareholders/bondholders rather than the investment bank.
and the banks now free up capital to purchase more loans and start the cycle over. Now, risk retention rules require issuers to hold a 5% stake, either a vertical or a horizontal strip in the security.
wait
but when the bank sells the shares to investment banks, they get the 10% interest or they get nothing? because whats the point of giving 1b to mortgage and selling it for 1b to investment banks?
the bank gets fees for selling loans to investment banks.
Alex Gon thnx mate
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
Genius
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
the part I don't understand is what the investment bank is creating, all you say is a sort of entity. What are they actually creating can someone help me out here. Are they creating a company with shares in the company/ bonds in the company any please and thanks :)
yes you can imagine this entity as a company, helping companies IPO - That is what investment banks do.
Actually when you think of a company, all of them has regularly incomes and expenses. In this case the income is the payment by mortgagers, and the expense is debt payment to the shareholders.
The only difference is that this special company may have no value after all mortgages are due. (unless it bears more new mortgages from commercial banks afterwards)
So this "shares" are stock or bonds?
how does the investment bank make money off these MBS if they are just passing it on to the SPE? Also, how does the SPE make money off the MBS when they pay the investor 10%? Should they pay them a lower return such as 3% so they can make a 7% return for themselves? Thanks
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!
liquidity
Thanks, Wikipedia made no sense to me about this, as usual.
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. :(
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?
What are some examples of "special purpose entities"? do you just mean public firms in general?
HungryJ10 special purpose vehicles...SPV
So is that entity like a regular publicly traded company such as Ebay, GM, Ford etc?
no, these shares are usually available to institutional investors - pension funds, hedge funds, etc.
Hi there, can somebody answer me. Why doesn't the investment bank use it original $1B to buy the shares and sell it out for $1.1? I don't see why it has to give the commercial bank $1. Many thanks in advance
So that entity that you’re talking about is more so like a ticker symbol in the stock market? Is this what Freddie Mac & Fannie Mae are at the end of the day? Where shareholders of their stock are entitled to a share of payments from the original borrowers? If yes, I don’t know why it’s not explained this easily. If not, I still must be misunderstanding somewhere.
Eventually is the key word.
Who wants to wait 30yrs for a paycheck?
And there is absolutely no guarantee that those borrowers are going to pay that loan off. It's a risky investment. That's why they pawn it off so quickly.
Quick money. They don't want to be responsible. The corporation is the protective shield for responsibility.
The problem is that the original mortgage is resold in bulk and finding the true owner of the note is next to impossible sense the original bank is still accepting the payments however in a foreclosure the bank that is suing will dodge any attempt to produce the original note but luckily most state laws forbid this illegal practice if a person stands up to it. Break it up a million ways but the owners of the note better show up in court in person so a defendant can confront his accuser.
WOW!!!
I cant quite get this part at 4:25 which says :" So now when they sell this shares in this entity, people are going to give them, hopefully, more than what they were paid for it.Maybe there is a lot of demand for this type of asset where I get this type of income stream." did he mean that each share do not necessarily has to be 1,100 dollars? because he mentioned afterwards something like "i DONT KNOW, MAYBE the investors paid 1.1b dollars."
I M RELI CONFUSEDD
okay, so after the bank committing the entire loan portfolio to the investment bank for 1 billion and charging fees for that? Now the liability to service interest/principal by the customer/borrower is towards the investment bank? so does the bank notify mortgage borrowers that now the payments( interest/principal) will be going to the investment bank or the borrower keep making interest payments to the bank and in turn, the bank forwards the interest received to the investment bank? innit?
Doesn’t this effectively re-merge commercial and investment banking in violation of the Volcker rule?
I just want to clarify, the investment bank creates new corporation/ entity? what are example of this newly created corporations?
Jesa Espineli shell companies in tax havens like Canary Islands, Mauritius.
Hey, so what I dont understand is why the bank (not the investment ban) itself cant create spe? could someone pls explain
Sometimes they can if they’re a big enough bank with an investment banking team (like Wells Fargo, BofA, Citi, Chase). But most smaller banks or regional banks that give people mortgages don’t have the size of expertise to create SPE’s and mortgage backed securities, so they sell the whole loans to specialized investment banks who can
@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
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