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frugalista

Securitized Mortgage And Other Personal Debts

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I know almost nothing about money markets, so this thread is just full of questions really.

I have read some posts on this forum and elsewhere indicating that martgages and other personal debt is now largely securitized. Does this mean it is being traded in non-government bond markets?

When large numbers of personal insovencies and mortgage defaults occur, is it therefore the case that the losers will therefore not so much be the lenders themselves but those who have bought these securities?

I have also heard hints that in the securitization process, the default risks have been masked or hidden somehow. Does anyone know how this works?

Finally, what elements of our investments might be subject to the fallout from these scenarios and what should we do about it?

frugalista

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On this note, I had a very effective way of not getting into debt* when I was at Uni. As I didn't get a grant, I couldn't get any bank to give me a grad loan or overdraft. Not a penny. *I did get the Student loan, which was only £1k a year, and I didn't have to start paying it back till I was earning 85% of the average salary (currently about £1750 p/m before tax). Now every student can get a loan with no real proof of ever being able to pay it back.

My sister left with £17k of debt, me with £2.5k. Difference in timescale = 5 years!

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On this note, I had a very effective way of not getting into debt* when I was at Uni. As I didn't get a grant, I couldn't get any bank to give me a grad loan or overdraft. Not a penny. *I did get the Student loan, which was only £1k a year, and I didn't have to start paying it back till I was earning 85% of the average salary (currently about £1750 p/m before tax). Now every student can get a loan with no real proof of ever being able to pay it back.

My sister left with £17k of debt, me with £2.5k. Difference in timescale = 5 years!

What did you live on?.

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I have read some posts on this forum and elsewhere indicating that martgages and other personal debt is now largely securitized. Does this mean it is being traded in non-government bond markets?

Yes.

http://www.investopedia.com/articles/04/111804.asp

Asset-Backed Securities

The concept of an ABS is similar to that of an MBS, but ABSs deal with other types of consumer debt, the largest of which are credit cards and auto loans. An ABS, however, can be created from almost anything that has material and predictable future cash flows. For example, in the 1990s, royalties from David Bowie's song collection were used to create an ABS.

The big difference between an ABS and a MBS is that an ABS tends to have little or no prepayment risk. The structure of most ABSs is at AAA, the highest credit rating. Because this asset class is relatively new, it has not been well tested through all kinds of market cycles.

Personally, I think it's ridiculous that they've given it a triple-A investment rating (the highest possible rating) when they don't even know what happens to these things in a downturn. There is no way a bond made up of people's credit card debt is as safe as government paper (which is effectively what they're saying).

http://www.housepricecrash.co.uk/forum/ind...18entry146118

When large numbers of personal insovencies and mortgage defaults occur, is it therefore the case that the losers will therefore not so much be the lenders themselves but those who have bought these securities?

Yes. The bondholders take the hit, not the lenders. The lender will likely handle the repossession and sale, etc in the event of a default (and probably charge handsomely for doing so), but it is the bondholder who will be left with the financial loss.

http://www.egyptse.com/download/research_p...0Securities.pdf

http://www.post-gazette.com/pg/04159/328287.stm

Locally, at least two banks -- National City and PNC -- have invested in mortgage-backed securities portfolios held by HSBC.

A PNC spokesman said about a third of the bank's $16.9 billion investment portfolio is made up of mortgage-backed securities, "all of which are highly rated by Moody's and Standard & Poor's

http://www.bankofny.com/htmlpages/npr_2004...53631353842.htm

I have also heard hints that in the securitization process, the default risks have been masked or hidden somehow. Does anyone know how this works?

Well, it's very simple. The ratings agencies (Moody's, Standard and Poor's) have given these things credit ratings way above their actual creditworthiness.

Finally, what elements of our investments might be subject to the fallout from these scenarios and what should we do about it?

Well, in America ABS's and MBS's are mostly owned by life insurance companies, pension funds, mutual funds, etc. I suspect the same is true here. So you should check your own holdings very carefully. I suspect many pension funds are investing in these, fooled by the high credit ratings. It's going to be yet another pensions scandal.

http://handouts.soa.org/conted/cearchive/s...onio/043_bk.pdf

page 18.

Edited by zzg113

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zzg,

Yes, how on earth can some of this debt even have a rating when in the background for a large number of people there is little or no financial headroom to service it?

http://www.thisismoney.co.uk/credit-and-lo...9&in_page_id=62

Thirtysomethings hamstrung by debt

This is Money

10 May 2005

NEARLY half of 26 to 40-year-olds would not be able to financially survive for a month if they lost their jobs due to their high level of debt.

An increasing number of that age group are fuelling their lifestyle through credit cards and loans, with a third admitting to short-term debt of more than £5,000.

The majority of the group view their debts as an everyday part of modern life and feel they are in control of their finances.

But research from credit reference agency Equifax found many would fall behind on credit repayments after just one month if they lost their job.

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"securitized... is it therefore the case that the losers will therefore not so much be the lenders themselves but those who have bought these securities?"

EXACTLY.

And a good question is: Who is buying these securities?

Asians, if they are packaged right.

Here's a US perspective from Jim Willie:

"The American public has long regarded the housing sector to be sacrosanct, and somewhat immune from downward pressures in a childlike manner. The entire bond speculation enterprise with all its leverage and financial engineering is designed not only to generate carry trade and yield trade profits, but also to support the housing industry. The Asians have been involved, and Americans believe naïvely that foreign mortgage finance support will always be there. They regard Asian support as an entitlement."

...MORE: http://www.financialsense.com/Market/willie/2005/0803.html

hmm I see. Asians eh? So they are truly the creditors now. Mind you, the West has quite cunningly hoodwinked them into buying into the bubble, and they won't be able to take full advantage of our distress when it all goes mammaries perpendicular over here.

One good thing to come out of all this though is that the fallout should be so shocking it will dissuade anything similar from happening during the remainder of my lifetime. Fingers crossed.

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Mortgage and asset backed securities are ticking financial time bombs. When the bubble bursts it will become painfully clear what they are made of.

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One of the driving forces behind banks' eagerness to maximise lending regardless of credit risk has been the growth in morgage-backed securities' markets. The banks don't have to worry too much about risk, since they're shifting a lot of it into the secondary market. They do have to compete with other banks for customers though, and so you end up with a race to the bottom on credit standards.

This is another factor which could stop interest rates from falling even if the BoE keeps cutting - as defaults rise, the premium demanded in secondary markets will rise, and banks will have to charge higher interest to borrowers with weaker credit ratings.

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:lol:  Your avatar NMB   :lol:

EDITED: due to not being able to make a coherant sentence:

Actually brings  a smile to my face knowing that other people can find that cool, wouldnt of tied you to that avatar any day of the week, looks like there is still scope for people to suprise me.  :lol:

ffs, how can one person mess up a post so badly, ive edited that 4 times, now ive quoted, im just not making any sense at all, im sure youll piece it together though NMG :lol:

Edited by theChuz

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You like it? Took me a while to get it working. Not web savvy enough, needs looking into sometime.  :)

I love it, its just over the top , hope there isnt any copyright as ive all ready stole it. :D

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read Liar's Poker by Michael Lewis:-

http://shrinkster.com/7a0

about CMO's, or 'Collaterised Mortgage Options'.

This is how banks bundle up the mortgages they've sold to property buyers into bundles of bonds that they then sell to investors, typically in countries where the interest rate is lower than ours (US, Japan, Euro...). The need to sell more mortgages, to be able to sell more bonds, may also explain why lending criteria such as earnings multiples or even honesty about income is ignored.

When the interest rates in the countries that buy these bonds go higher than the UK, the market for these bonds dry up....and the UK banks get more careful about selling mortgages.

It happened before. It'll happen again.

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read Liar's Poker by Michael Lewis:-

http://shrinkster.com/7a0

about CMO's, or 'Collaterised Mortgage Options'.

This is how banks bundle up the mortgages they've sold to property buyers into bundles of bonds that they then sell to investors, typically in countries where the interest rate is lower than ours (US, Japan, Euro...). The need to sell more mortgages, to be able to sell more bonds, may also explain why lending criteria such as earnings multiples or even honesty about income is ignored.

When the interest rates in the countries that buy these bonds go higher than the UK, the market for these bonds dry up....and the UK banks get more careful about selling mortgages.

It happened before. It'll happen again.

Exactly, meanwhile the banks take their cut from all the other bits and pieces - not caring two hoots about the eventual fiancial circumstances of their clients or indeed the state of the overall economy when they are all done.

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ANd carry these thought forward...

When this great wealth is lost to the asians Like the halt and reverse of HPI thn will thier economies not contract and ther demand for energy too.

Unemployment and recssion can come to manufacturing powerhouses too you know. Like the US in a1930s...

Because of the hyper inflationary stance of the USA and its flodding liqidity onto global markets there will be spectacular commodity gains but. Just like propaganda for war at that time dont expect any one to tell you. Then you will need indipendant judgment like us property bearsa have used to see the woods for the trees against the media bulls of last year.

SO this current comodity runn will see a correction. IMH view. If or when the situation changes and the USD unwinds then the media will come under orders to profess no inflation and brain wash us not to buy commodity assets or to exchange cash for hard assets. That will really be the time to move..

sp1

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  • 301 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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