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I just can't understand how there isn't fraud involved here. If someone claims that they have a mortgage back security that was worth $2.7 million, and is now

by aero142 17y ago

I just can't understand how there isn't fraud involved here. If someone claims that they have a mortgage back security that was worth $2.7 million, and is now worth $36,000, that is 1.3c on the dollar. I just can't believe that these things are backed by real houses. I don't understand how any house, no matter how overinflated, could be worth so little. Even houses purchased in the worst bubble market, foreclosed on, where the previous owners punched holes in the sheet rock on the way out, and sold at auction, shouldn on average be worth only $36,000 now. There must have been fraud about what is actually backing these securities.

hga 17y ago
You're confusing worth with price. $36,000 is what someone was willing to sell it to them for. The main buyer obviously thinks it's worth more, although maybe not a whole lot, he was searching for something particularly distressed so that the NPR people could with only $1000 buy a non-minuscule fraction. What it's worth when it's held to maturity is another thing, something the NPR crew will be finding out in due course. Don't insist on malice when incompetence is a possibility. There were honest and/or stupid mistakes made. The biggest was assuming that the general upward march of residential real estate prices would continue, which wasn't entirely insane on its face.
cperciva 17y ago
Collateralized debts are sold in tranches: One guy gets the first 50% of the money, the next guy gets the next 20%, the next gets the next 20%, and the final sucker gets his share back only after the other 90% has all been paid off. (Actually, it's a bit more complicated than this, but you get the idea.) Even with a 50% drop in market prices, the guy with the "senior" tranche is happy; he's getting his money back. The guy with the last 10% was never expecting to get all of his money back, so while he's disappointed about being completely wiped out, he's not altogether shocked. The collateralized debt crisis is basically all about those people in the middle -- the 50%-90% range. They thought their money was safe (they couldn't imaging the market dropping by more than 10%) and they paid a correspondingly high price as a result (i.e., they didn't get much of a discount vs. the face value of the debts), but it turns out that they're taking some of the losses too.
- motters 17y ago
  Sounds like a pyramid scheme to me.
  - p0ppe 17y ago
    More about pricing risk. Everyone can choose how much risk they're willing to take.
jfager 17y ago
That's not how it works. What happens is a bunch of mortgages of varying quality get thrown into a pool. The pool is then sliced up into a bunch of different investment vehicles. The lowest risk (and lowest return) investments get paid off first, and the highest risk (and highest return) investments get paid off last. The 2.7m -> 36k transition is on one of the higher-risk portions of the pool. The investor who paid in 2.7m basically bet that there would be plenty of money left over after the low-risk betters below him got paid off. He was wrong. The total value of the total pool probably only went down by 30% or so, but that's enough to completely wipe out the highest-risk level investor. Add on the fact that they were probably leveraged to get into the position in the first place, and now you understand why 2008 was a major clusterfuck.
jakarta 17y ago
Price is what you pay. Value is what you get.
DougBTX 17y ago
Further to what cperciva and jfager said, this bit stands out: At some point those homes will be taken over and sold for a loss. Every time that happens, the bond shrinks. Eventually, our part of the bond will disappear entirely. Until then, we get a little money every month from people paying off their mortgages. We just got a check for $141. It sounds like the guy knows he won't get any money if the underlying assets are sold, so their value doesn't really matter. He only gets paid when people pay their mortgages.
- viraptor 17y ago
  Does it mean that it doesn't make any difference for those people if they pay their mortgages or not? The houses will be taken over anyways... does it really make a big difference at this point?
  - JoachimSchipper 17y ago
    It's actually beneficial to the investors if they keep paying their mortgages; they certainly won't foreclose an a home unless necessary. So yes, it matters. By the way, didn't you see the "paid off" portion of their portfolio? It's quite big.

by aero142 17y ago

hga 17y ago

You're confusing worth with price. $36,000 is what someone was willing to sell it to them for. The main buyer obviously thinks it's worth more, although maybe not a whole lot, he was searching for something particularly distressed so that the NPR people could with only $1000 buy a non-minuscule fraction. What it's worth when it's held to maturity is another thing, something the NPR crew will be finding out in due course. Don't insist on malice when incompetence is a possibility. There were honest and/or stupid mistakes made. The biggest was assuming that the general upward march of residential real estate prices would continue, which wasn't entirely insane on its face.

cperciva 17y ago

Collateralized debts are sold in tranches: One guy gets the first 50% of the money, the next guy gets the next 20%, the next gets the next 20%, and the final sucker gets his share back only after the other 90% has all been paid off. (Actually, it's a bit more complicated than this, but you get the idea.) Even with a 50% drop in market prices, the guy with the "senior" tranche is happy; he's getting his money back. The guy with the last 10% was never expecting to get all of his money back, so while he's disappointed about being completely wiped out, he's not altogether shocked. The collateralized debt crisis is basically all about those people in the middle -- the 50%-90% range. They thought their money was safe (they couldn't imaging the market dropping by more than 10%) and they paid a correspondingly high price as a result (i.e., they didn't get much of a discount vs. the face value of the debts), but it turns out that they're taking some of the losses too.

motters 17y ago
Sounds like a pyramid scheme to me.
- p0ppe 17y ago
  More about pricing risk. Everyone can choose how much risk they're willing to take.

jfager 17y ago

That's not how it works. What happens is a bunch of mortgages of varying quality get thrown into a pool. The pool is then sliced up into a bunch of different investment vehicles. The lowest risk (and lowest return) investments get paid off first, and the highest risk (and highest return) investments get paid off last. The 2.7m -> 36k transition is on one of the higher-risk portions of the pool. The investor who paid in 2.7m basically bet that there would be plenty of money left over after the low-risk betters below him got paid off. He was wrong. The total value of the total pool probably only went down by 30% or so, but that's enough to completely wipe out the highest-risk level investor. Add on the fact that they were probably leveraged to get into the position in the first place, and now you understand why 2008 was a major clusterfuck.

jakarta 17y ago

Price is what you pay. Value is what you get.

DougBTX 17y ago

Further to what cperciva and jfager said, this bit stands out: At some point those homes will be taken over and sold for a loss. Every time that happens, the bond shrinks. Eventually, our part of the bond will disappear entirely. Until then, we get a little money every month from people paying off their mortgages. We just got a check for $141. It sounds like the guy knows he won't get any money if the underlying assets are sold, so their value doesn't really matter. He only gets paid when people pay their mortgages.

viraptor 17y ago
Does it mean that it doesn't make any difference for those people if they pay their mortgages or not? The houses will be taken over anyways... does it really make a big difference at this point?
- JoachimSchipper 17y ago
  It's actually beneficial to the investors if they keep paying their mortgages; they certainly won't foreclose an a home unless necessary. So yes, it matters. By the way, didn't you see the "paid off" portion of their portfolio? It's quite big.