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The process of packaging the loans together is always the part that I don't understand. Better yet, I understand why one would do it but the process of how it
by JumpinJack_Cash 3y ago
The process of packaging the loans together is always the part that I don't understand.
Better yet, I understand why one would do it but the process of how it happens, what are the criterias and finally how would the original underwriter go about selling the now packaged loans is still something I don't understand.
Also what are the data that investors look at when they trade such instruments. For example with stocks one looks at earnings, balance sheets, moats etc. But with MBS what are the parameters? You can only know for sure by exploding the MBS and analyze the underlying loans one by one like that guy did in 2007/2008.
- rahimnathwani 3y agoDisclaimer: my understanding below, but I don't work in the industry and haven't looked at this for a long time, so things might be wrong or have changed. SPV is created which owns the loans and issues the securities. Securities are issued with varying degrees of seniority. Each tranche is rates by a ratings agency (Fitch or whoever). SPV may enter into derivatives contracts to reduce some tail risks, because these allow more of the tranches to have higher ratings. Buyers are often restricted to buying above a certain rating. I don't think they do their own modelling of individual MBS.