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An MBS is NOT a derivative. It's a cash product. Either way you're missing the point. Securitisation is just a way of funding lending. Whether you use deposits,
by retube 13y ago
An MBS is NOT a derivative. It's a cash product. Either way you're missing the point. Securitisation is just a way of funding lending. Whether you use deposits, borrow from the money markets, or securitise loans, the money to make those loans has to come from somewhere.
Ultimately it was mortgage brokers and the retail banks (or retail arms of universal banks) that sanctioned these mortgages and lent money to highly unsuitable people. Yes they were securitised and sold on but as I say above this is just a funding mechanism. Yes the IBs have some responsibility for not checking the quality of the loans but then there's an argument that should have been done already by the retail side. And of course no-one imagined that default rates would ever get as high as they did - which did wipe out some MBS and CDO tranches resulting in large losses for the holders. As an indication these types of issuance were typically stressed at default rates of 10% - and that was considered extremely conservative. What actually happened was some of these mortgage pools were so crappy default rates hit 80% or 90%.
- redblacktree 13y agoWhy would a mortgage broker care to do his due diligence, if he knows he'll sell the loan tomorrow, and take none of the risk of default? This is about incentives. Incentives that were bound to lead to excessive risk taking and an inevitable crash.
- nissimk 13y agoDerivative does not equal swap. MBS is definitely a derivative. It's a bond whose price and cash flow is based on an underlying pool of loans. The mortgage loans themselves are not derivatives, but mbs are. Stock options are cash products and they are most certainly derivatives.
- retube 13y agoSorry you are wrong. MBS is not classed as a derivative. As pointed out above it's actually a structured finance product. But anyway as a simple sum of underlying cash products it's still a cash product (you pay upfront cash equal to the notional of the instrument) A stock option on the other hand is most definately NOT a cash product, although the underlying is. The stock itself is not traded , it's just a financial contract whose value is a function of the stock price.