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jareth

Cdos And Re-mortgages

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Could anyone help me understand CDOs and the effects the sizeable re-mortgage market might have had on them please.

What happens when a mortgage bundled up in a CDO gets paid off by re-mortgaging?

I've come up with two options:

1. The lump sum from the new lender goes to the old lender who passes it on to the CDO holder.

2. The lump sum goes no further than the old lender and the long term obligation the old lender has to the CDO holder remains.

With option 1 the CDO holder loses out on the long term income stream. This would have the effect of worsening the return on CDOs wouldn't it? Have enough people re-mortgage and you get your money back quickly but without much profit from the interest. This is bad for the CDO holder.

For option 2 the lump sum would have to be reinvested somewhere in order to provide a return to meet the continuing obligations to the CDO holder. This would be bad for the CDO issuing bank. It would mean they either lend the money out as another mortgage but with little or no margins on it (as the interest is going to the CDO holder to pay the for the original mortgage) or they buy CDOs with it themselves.(Hoping the income from the new CDO helps cover the obligations of the old one)

With both options, a breakneck rate of re-mortgaging would appear to be a risk. Either CDO holders don't get the return they expected (and have to find some other place to put the cash they get back early) or banks end up with a pile of cash that needs to be earning a return to cover their historical obligations to older CDO holders. Did the CDO market accelerate the banks to some inbuilt limit on the issuance of mortgages? The need for homes grows only so fast, the homes can only be built so fast and people are only inclided to re-mortgage so often.

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Generally, the CDO holder gets 2 things :

1. A stream of cashflows agreed to by the CDO issuer at the inception of the transaction on the "surviving" size of the portfolio until maturity.

2. (1-Recovery) on defaulted underlyings and the par value of the "surviving portfolio" at maturity.

The problem that you have described is one for the CDO sponsor and is usually addressed in the substitution rights / collateral arrangements for the CDO.

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I was thinking about mortgages and MBS/CDO's etc.. last week.

Got me thinking. If you have a mortgage do you have the right to demand the Bank tells if your mortgage has been included in a CDO/MBS ?

Can you demand they tell you who owns the CDO/MBS your mortgage has been used for ?

I know the mortgage product is the banks, but it is guaranteed on an asset that you legally 'own'. Does this give you the right to find out where the 'ownership' of the mortgage is ?

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I was thinking about mortgages and MBS/CDO's etc.. last week.

Got me thinking. If you have a mortgage do you have the right to demand the Bank tells if your mortgage has been included in a CDO/MBS ?

Can you demand they tell you who owns the CDO/MBS your mortgage has been used for ?

I know the mortgage product is the banks, but it is guaranteed on an asset that you legally 'own'. Does this give you the right to find out where the 'ownership' of the mortgage is ?

I don't know for sure but I don't think so.

I am not even sure that all of the originators of mortgage even know who the beneficial owners are for simpler RMBS product let alone CDOs. If a mortgage is in a CDO of RMBS, the beneficial owner of a mortgage may actually change as it moves between tranches depending on the performance of mortgages in other parts of the capital structure.

A big part of the problem with respect to restructuring mortgages in the U.S. is that the holders are now a very diverse group of people through these sorts of vehicles rather than just banks which makes government mandated renegotiation very difficult.

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I don't know for sure but I don't think so.

I am not even sure that all of the originators of mortgage even know who the beneficial owners are for simpler RMBS product let alone CDOs. If a mortgage is in a CDO of RMBS, the beneficial owner of a mortgage may actually change as it moves between tranches depending on the performance of mortgages in other parts of the capital structure.

A big part of the problem with respect to restructuring mortgages in the U.S. is that the holders are now a very diverse group of people through these sorts of vehicles rather than just banks which makes government mandated renegotiation very difficult.

Cheers for that. Not having a mortgage myself I can't just go and ask them !! The complications for tracking that you raise above could be an issue.

However I know they have special systems set up that they use for selecting the right mortgages for a deal. They will definitely have a list of every mortgage that has been used in any securitisation deal. What if you simply demand to be told if your mortgage has been used in any securitisation deal ?

I am no Laywer but there must be a good chance a lender has to tell you. Your property is being used as a guarantee for the mortgage agreement. If this has been sold on there must be some Legalities.

Any Legal Eagles out there !!??

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In theory they could bet on interest rates to hedge it, and when they invest in the scheme research what early repayment and remortgaging is likely. Some people might want to be put into a tranche where the lifespan might

be shorter.

Seems another balancing act, if people are repaying or remortgaging what % above your predictions will you take action, what do you expect to be happening to interest rates and mortgage deals on offer, how will inflation be

working and what can you do to hedge these changes. Are you happy to accept a shorter lifespan and be left

holding cash in this low interest rate environment and where will you put that money.

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Guest sillybear2

If there is an early repayment the bank operating the SIV structure will simply replenish the pool, same applies if the credit quality of the pool deteriorates.

In theory ;)

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  • 285 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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