Mortgage support bond, English is Mortgage-back security, Abbreviation MBS It is a loan investment bond based on housing mortgage loans.
The operating model of mortgage support bonds can be simply understood as buyers loans to the bank.The bank collects a certain amount of loans issued by the bank, and then packed and sold to third-party institutions.The bank has recovered the loan principal.Third-party institutions securitize these loans and then sell them to investors.The final process became a buyer who slowly returned the loan money to investors who bought mortgage support bonds.
The investment of mortgage support bonds is closely related to the development of the real estate industry and the market interest rate, the development of real estate is stable, and the benefits of mortgage support for bond investors will also stable.When the market interest rate starts to fluctuate, it will affect the fluctuation of the real estate industry, which will lead to mortgage supportThe benefits of bond investors fluctuate unstable.Excessive issuance of mortgage support bonds is considered one of the main reasons for the outbreak of the financial crisis in 2008.
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Directory of this article
- How is mortgage support for bonds?
- How does commercial banks and investment banks and MBS investors make a profit?
- How does MBS cause the 2008 economic crisis?
- Join investment discussion group
How is mortgage support for bonds?
In the traditional home purchase loan, buyers loans to the bank, and then repay on schedule.The bank slowly recovered the principal and interest through the repayment of the buyer.At the same time, the buyer was unable to repay on time, resulting in the risk of loan breach of contract.
The invention of mortgage support bonds has transferred the risk of banks.The entire process is:
- Buyers buy a house from a bank loan, sign a loan agreement to determine the loan interest rate.
- The bank raised multiple loans and sold these loans to third parties after reaching a certain amount.Usually it is government agencies (for example, Ginnie MACE), government guarantee institutions (such as Fannie Mae) or private institutions (such as investment banks)Essence
- When the loan is sold, the bank will immediately recover the loan principal and immediately use these principal to the new loan issuance.
- After buying these loans in a third party, it will securitize it, that is, the loans are converted into mortgage support bonds and sold them to individuals and securities institutions.
- Investment institutions, individual investors, etc.to buy these mortgage support bonds, the third convenience immediately recovered the loan principal.
- The buyer is paid to the investment institution or individual investors according to the loan contract on schedule according to the loan contract, and the repayment amount will be paid to investment institutions or individual investors.
It can be seen that throughout the process, the bank played the role of the middlemen, connecting the lender and investors, and was responsible for transferring loan contracts.Take income.
The issuers of mortgage support bonds are usually related US government agencies, such as Ginnie Mae, a national mortgage lending association, or institutions that have been trusted by the US federal government, such as FANNIE MAE and federal housing loan mortgage loan companies, FANNIE MAE, MAC et al., There are also private distribution institutions, which are usually called Private Label, including investment banks, financial institutions, and subsidiaries of housing builders.
Among these three types of distribution agencies, Ginnie Mae is a government agency, so it is the institution with the lowest risk value; although Fannie Mae and Freddie Mac have not been guaranteed by the government, they have received high government trust and they promise to investors to perform their contracts to perform their contracts.The payment amount, that is, if the buyer cannot repay the loan, the Fannie Mae and Freddie Mac will replace the buyer to pay the principal and interest on the buyer instead of the buyer.The issuer of private agencies is the highest risk value of the three.Once the buyer cannot perform the contract to repay the loan, investors will directly suffer.
Investors obtain interest returns based on the mortgage-supported bond purchase contract, which is different from most ordinary debt rights every six years or every year.The frequency of payment of mortgage support bonds is once a month, which is the same as the loan repayment frequency.
There are two main types of mortgage support bonds currently on sale: PASS-Throughs and COM:
- Pass-Throughs is a relatively simple mortgage support bond.Generally, a 5 -year, 15 or 30 -year loan is collected, and then the collected loan payment is distributed to investors in the form of trust, or the income that investors can get based on fixed interest rates or adjustable interest rates.Because such securities are directly linked to the loans of buyers, the investment time is usually lower than the expected investment date with the repayment of the repayment, especially when the repayment person decides to repay in advance.
- CMO, the full name is Collateralized Mortgage Obligations, translated as a mortgage guarantee bond.It is a mortgage support bond consisting of several mortgage loan pools.Different mortgaged loan pools are called “parts”.Each part has its own rules.To calculate the principal and interest, investors need to conduct a large number of research before investing to determine their investment targets.
How does commercial banks and investment banks and MBS investors make a profit?
Different links earn benefits in different ways during the entire transaction process of mortgaged bonds.
How to make a profit from the loan bank
After issuing a certain amount of loans, the Loan Bank will package it to a third-party institution.In the process, the loan bank will charge some fees as the income, such as the evaluation fee APPRAISAL Fee, the initiative of the initiative, the transfer fee, the transfer fee, and the property fee TitleFee et al.At the same time, because the loan bank immediately obtained the principal after selling the loan, the loan issuance can be issued again to earn the same income again.At the same time, before the loan bank is packed to a third-party institution, the bank can still be able to still be able to still do it.Earn benefits by collecting mortgage interest.
How to make a third-party agency profitable
The profit of third-party institutions is mainly due to the premium of MBS, that is, after the third-party institution purchases the loan from the loan bank, it will add a premium on the basis of the purchase price and sell it to investors at a higher price to investors.Essence
for example:
The third-party institution purchased a loan of $ 100 m at a interest of 5% (a total of $ 100 m x 5% = $ 5 m).The institution was split into 1 m equity.= $ 100), at the same time, the interest of each equity is $ 5/year ($ 5m/year ÷ 1m = $ 5/year).
In theory, the cost of each equity is $ 100, which can generate $ 5 a year.However, third-party institutions will not be sold at $ 100 at cost, and they often sell at higher prices, such as $ 108/equity sales.
In this way, if a third-party institution sells all the equity of the left and right 1M, it will immediately get a revenue of $ 8 m ($ 108 x 1m – $ 100 x 1m = $ 8m)
How to make MBS investors profitable
The main income of investors is loan interest (Mortgage Interest), because in general, MBS’s income is higher than deposit interest, as well as most national debt.As long as the lenders make a stable loan repayment, investors can get investment income higher than ordinary savings and Treasury vouchers.
How does MBS cause the 2008 economic crisis?
Mortgage support bonds are the most important causes of economic crisis in 2008.The main process is:
From 2000 to 2006, US house prices continued to rise, resulting in a large number of bonds for mortgage support.Because with the increase of buyers, banks can get extremely high returns through a large number of trading loans.And third-party institutions also obtain high returns through issuing mortgage support bonds.From 2000 to 2006, the rising trend of house prices made investors who support bonds that support bonds believe that this is a stable investment and can get good benefits.At this time, mortgage support for the issuance of bonds and market prices in markets showing each other.
However, in the first step in this process, the credit of the bank’s credit of the lender decreased as the loan volume increased, which led to the issuance of a large number of sub-mortgage loans (Subprime Mortgages), that is, the bank issued the loan to the loan to the loan toThe low credit rating lender has led to the risk of loan repayment of breach of contract.
Beginning in 2007, the rise in house prices began to stop, and a downward trend appeared.As a result, a large number of loans cannot repay the loan because of the decline in house value.Among them, the number of second mortgage loans is the largest.
The constant loan defaults led to the collapse of the real estate market, which also directly led to the loss of mortgage support for bond investors, including a large number of individual investors, pension funds, and financial institutions.Therefore, almost everyone suffered losses.At this time, institutions issued mortgage support bonds want a large number of mortgage support bonds that have not been issued, but there is no market, which leads to serious losses of a large number of institutions.And closure.
When the trend of mortgage support for bonds and house prices has lost balance, it has caused a large-scale economic impact of connection.Therefore, the bank has strictly strictly stipulated the lender’s review standards to avoid similar situations.
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