Mbs Paper

294 Words2 Pages
Mortgage securitization happens when mortgage loans are originated in the market, and then packaged or “bundled” by an intermediate lender, and sold in bulk to a securities firm like Bear Stearns or Lehman Bros. The securities firm will then create shares or securities “backed” or securitized by these loans. The securities are then sold on the open market to investors. The entire package is of securities is supposed to be backed by these mortgage loans which are liens on real estate. When the mortgagors make their payments, the securities firm collects the money, and distributes the profits to the investors. It all works really well as long as everyone makes their payments. The problem occurs when the payments aren’t made. There is no cash flow, so the attractiveness of this investment is diminished. This is what happened beginning in late 2007 and early 2008. The loans were structured with artificially low introductory rates that adjusted upwards and raised the payments on the mortgagors. In addition, many of these loans were made based on fraudulent information, such as income and value verification. As a result many of these loans were doomed from the start. All lending allows for some amount of delinquency, but when you combine a massive number of loans for which the borrower’s did not really qualify with a pervasive increase in payments, disaster should not be a surprise. Foreclosure became rampant, real estate values quickly diminished and the value of a mortgage backed security investment became worthless because of the stoppage of cash flow as well as the “paper” having a higher face value now than the real estate that supported it (know as underwater or upside down). Billions of dollars of value evaporated over a very short period of

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