Are Mortgage Backed Securities Still a Risky Investment?

In summary, the article discusses how poor regulation of MBS caused the 2008 financial crisis. The author also points out that despite the recent changes to MBS, there is still a risk that a company could go bankrupt if something catastrophic happens. The author also mentions that companies that pay good dividends are usually ones that are doing well, and that it is probably time for Greg to retire.
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  • #2
Iforgot said:
This link really ticked me off

Why did it upset you? Can you explain?
 
  • #3
Poor regulation of MBS are what caused the 2008 crash. The article didn't mention that at all, or what has been done to rectify the underlying issue. He mentions book value?! Guffaw! Who decides how much the underlying real estate is worth? The Fed with their 40 bil MBS purchasing?

I'm no finance dude, but that bozo, Adnan Khan, who wrote that article doesn't mention any of the risks or greater politics involved. I feel he's actively trying to mislead people who don't know any better.

He is an individual blogger, but Motley has a reputation to uphold.

What are your thoughts Greg?
(And what happened to the job posting section? My physics postdoc is finishing up soon and I'm about to start looking)
 
  • #4
Iforgot said:
Poor regulation of MBS are what caused the 2008 crash. The article didn't mention that at all, or what has been done to rectify the underlying issue.
True, but they've been around for 45 years and it is only because of some changes to them 10 years ago that there were problems. So that doesn't automatically mean that this is a bad investment.
He mentions book value?! Guffaw! Who decides how much the underlying real estate is worth?
Book value is what is written on the mortgage documents. It may as well be set in stone. I'm not clear on what your complaint is with that. Are you thinking that because real estate can vary with markets that that makes the value variable? If so, you misunderstand: a mortgage is a contract with a fixed value, not fixed to the value of the property it is associated with.
I'm no finance dude, but that bozo, Adnan Khan, who wrote that article doesn't mention any of the risks or greater politics involved. I feel he's actively trying to mislead people who don't know any better.
It appears to me that it is strictly factual and that you may be reading something into it that isn't there or responding to an emotion/bias.
 
  • #5
The headline does make you wonder:

Undervalued Financial Stock Yielding 14%

How can a financial company "with a large chunk of its portfolio" based on 30 year mortgages pay 14% when mortgage rates are around 4%?

I have heard of companies paying good dividends to attract people's money.
I had a friend who had his life savings in Citigroup.
He said he loved them because they paid great dividends.
He committed suicide a while back.
His name was Greg, coincidentally.
He wasn't quite my age, but pretty close.
I could tell he was getting tired.
Let's see, he had about $200,000 invested, making $8000 a year in dividends.
Which turned into $15,000, making about $.50 a year in dividends.

Wow. That's kind of depressing. :frown:

Do you really think there are people that haven't been paying attention?
 
  • #6
How can a financial company "with a large chunk of its portfolio" based on 30 year mortgages pay 14% when mortgage rates are around 4%?

by borrowing at a lower rate to invest in the business. I.e. leveraging. Which means they're even more susceptible to market fluctuations. If something like a margin call happens, they're wiped out.

And yes I'm emotional about this! Any who claims they aren't is either a liar, a sociopath, or has some form of autism...
 
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  • #7
before mortgage backed securities were issued in 1968, every small bank in america was a leveraged pool of mortgages. Why is the fact that a few publicly traded companies have leveraged themselves to invest in mortgage a serious problem?
 
  • #8
OmCheeto said:
The headline does make you wonder:


How can a financial company "with a large chunk of its portfolio" based on 30 year mortgages pay 14% when mortgage rates are around 4%?
I'm reasonably certain the complexity enables you to get around that. The way I understand it is that it is a bet on a bet, so you are betting on just the gain/loss not on the entire principal.
 
  • #9
BWV said:
before mortgage backed securities were issued in 1968, every small bank in america was a leveraged pool of mortgages. Why is the fact that a few publicly traded companies have leveraged themselves to invest in mortgage a serious problem?
1. Government policy changes in the 1990s drove the quality of the mortgages down.
2. Government deregulation of the investments/banks in the 1990s allowed banks to be their own investment companies and "independent" rating agencies, which hid the fact that the quality had gone down.
 
  • #10
russ_watters said:
1. Government policy changes in the 1990s drove the quality of the mortgages down.
2. Government deregulation of the investments/banks in the 1990s allowed banks to be their own investment companies and "independent" rating agencies, which hid the fact that the quality had gone down.

the mortgage REITs like NLY hold agency (conforming) mortgages, not subprime or alt-A - just like S&Ls used to
 
  • #11
russ_watters said:
I'm reasonably certain the complexity enables you to get around that. The way I understand it is that it is a bet on a bet, so you are betting on just the gain/loss not on the entire principal.

no, most mortgage REITs simply leverage agency pass-throughs. NLY, for example, is levered 8-1 (which is below the 12-1 regulatory capital requirements for commercial banks)
 
  • #12
I recently sold a house, getting several offers at the same time. The highest offer, that I did NOT accept, was dependent on the buyer getting a mortgage for 98% of the purchase price with a 2% down payment. No, apparently we haven't learned anything!
 

What are mortgage backed securities?

Mortgage backed securities (MBS) are financial instruments that are created by pooling together a large number of mortgages and selling them as a single security to investors. This allows banks and other mortgage lenders to free up capital and continue issuing loans, while investors can earn a return on their investment through the monthly payments made by the borrowers on the underlying mortgages.

How are mortgage backed securities created?

MBS are created by a process known as securitization. This involves a bank or mortgage lender pooling together a large number of mortgages with similar characteristics, such as interest rates and loan terms. These mortgages are then sold to a special purpose vehicle (SPV), which issues bonds or securities backed by the underlying mortgages. These securities are then sold to investors, who receive payments based on the interest and principal payments made by the borrowers on the underlying mortgages.

What are the risks associated with mortgage backed securities?

Like any investment, there are risks associated with MBS. The main risk is that borrowers may default on their mortgages, causing a decrease in the value of the underlying assets and potentially leading to losses for investors. Additionally, changes in interest rates can also affect the value of MBS, as rising rates can make the underlying mortgages less attractive to investors.

Who invests in mortgage backed securities?

MBS are typically purchased by institutional investors such as banks, pension funds, and insurance companies. However, they can also be purchased by individual investors through mutual funds or exchange-traded funds (ETFs).

What role did mortgage backed securities play in the 2008 financial crisis?

MBS played a significant role in the 2008 financial crisis. The widespread issuance of subprime mortgages and the subsequent bundling and selling of these mortgages as MBS led to a housing market bubble, which eventually burst and caused a ripple effect throughout the financial system. The default of these mortgages resulted in significant losses for investors, leading to the collapse of several large financial institutions and a global recession.

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