Mortgage-backed securities III발음듣기
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Mortgage-backed securities III
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So just to simplify. Keep it in your mind. $1 billion goes to a bunch of borrowers, goes to 1,000 borrowers, to be specific.발음듣기
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And then we said, OK, well where does that money for this special purpose entity, or for this corporation, come from?발음듣기
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And so money came from when the owners of each of these mortgage-backed securities - each, let's say, paid $1,000 for the mortgage-backed securities.발음듣기
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And we said there are a million of these securities, so $1,000 times 1 million, that's where the $1 billion comes from.발음듣기
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Now one thing I want you to keep in mind is, they get 10% only if every one of these borrowers pays their loans, never defaults, never pre-pays.발음듣기
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So it's only 10%, indefinitely, if all of the borrowers pay all the money and never default or anything like that.발음듣기
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And actually that's what the buyer of the mortgage-backed security should try to figure out.발음듣기
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And this is what you probably read some articles about, these hedge funds with these computer models to value their mortgage-backed securities.발음듣기
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OK, for a given population pool in a given part of the country, what percentage of them are able to pay off their mortgage?발음듣기
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Say they default on a $1 million mortgage, and then the special purpose entity would get control of that house.발음듣기
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And then if that house is sold for $500,000 because the property value went down, then the recovery would be 50%.발음듣기
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So that's all of the things that someone needs to factor in when they figure out what will be the real return.발음듣기
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Let's say we are thinking about investing in a mortgage-backed security and we want to gauge for ourselves what we think the return is going to be.발음듣기
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Well let's say we know that this pool of borrowers that - my pen keeps not working - that 20% will default.발음듣기
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And then when we go and get the property - because the loan was secured by the property - when we auction off the property, we only get $500,000 for it.발음듣기
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So if 20% default and then there's a 50% recovery, then on average you're going to get 10% of the loan is worthless.발음듣기
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But you can assume statistically, and since this is a large number of borrowers - it's 1,000, right?발음듣기
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If there's only one borrower it would be hard to kind of gauge when he defaults, if he defaults at all.발음듣기
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But when there's a large number of borrowers, you can kind of do the math and say, OK, on average 200 of these guys are going to default,발음듣기
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and instead of actually getting 10%, since 10% of the loans are going to be worthless, I'm going to get 10% less than this 10%.발음듣기
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But based on the model that we just constructed, I think the real return we're going to get on this mortgage-backed security is 9%.발음듣기
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but with a higher recovery, he or she would have a different kind of expected return from this security.발음듣기
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Before, in the case we did in the first video, when someone just borrows from the bank, the bank has very specific lending requirements.발음듣기
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Right? There might be people with really good credit scores, really good incomes, who don't have a down payment.발음듣기
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For the right interest rate and for the right assumptions in my model, I'm willing to give anybody a loan, as long as I'm compensated for it enough.발음듣기
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It allows - let's say this group of borrowers - let's say this pool of borrowers right here actually didn't--발음듣기
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they don't have 25% down and they don't have kind of the traditional requirements to get a normal mortgage--발음듣기
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but if I pool a bunch of people who don't have those traditional requirements, but they're good in other ways--발음듣기
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I can go through this alternate mechanism to find investors that are willing to loan them money.발음듣기
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So essentially, from the borrower's point of view, it allows more access to loan funding that they would have otherwise not been able to.발음듣기
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Maybe I feel that the computer models that I have are really good at predicting things like default rates, and recovery rates, and what a loan is worth.발음듣기
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It also might just have a risk reward characteristic that doesn't exist in the market already, and it allows you to diversify into one other asset class.발음듣기
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Now in the next presentation I'm going to show how you can, I guess, further complicate this even more, so that you can open up the investment to even a larger group of investors.발음듣기
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Because you can think about it right now, there's probably some people who say, OK, I already said, some people will do these models and try to make their own assumptions and say, OK, this is going to give me 9% a year.발음듣기
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But there's a whole bunch of people who are going to say this is just too complicated for me.발음듣기
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And there's another group of people who say, OK, 9%, that's nice and everything, but I'm a hotshot, I'm a gambler.발음듣기
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