Download Mortgage-Backed Securities, Home Values, and the Economic Crisis:

Mortgage-Backed Securities, Home
Values, and the Economic Crisis:
Clarifying how securitizing mortgages works and how the
decrease in housing prices affects the value of the
securities
Stephanie Rupinski
Honors Senior Project
Supplemental Powerpoint
1. Potential home-buyer looks at
purchasing a house
2. Potential home-buyer goes to the
bank and is approved for a mortgage
loan
3. All approved mortgages are
pooled together
MORTGAGE POOL
Mortgage 1
Mortgage 2
Mortgage 3
Mortgage 4
Mortgage 5
Mortgage 6
Mortgage 7
Mortgage 8
4. Mortgage pool divided into mortgage
backed securities (MBS)
*Different ratings given to each MBS
based on the perceived risk
MBS 1 (AAA rating)
MBS 2 (AA rating)
Mortgage Pool
MBS 3 (A rating)
MBS 4 (BBB rating)
MBS 5 (BB & below rating)
Goldberg, S. & Giedeman, D. Healing the global financial crisis. The
Journal of Corporate Accounting & Finance, September/October
2009, 14.
5. Highly rated MBS divided up
further; Lower rated MBS also
divided up
High Grade CDO
Senior ‘AAA’ rating
Junior ‘AAA’ rating
‘AA’ rating
‘A’ rating
‘BBB’ rating
Lowest rating
Senior ‘AAA’ rating
Junior ‘AAA’ rating
Each is
considered an
‘asset-backed
security’collateralized
debt obligation
(CDO). They
could be further
broken down and
sold as well.
‘AA’ rating
‘A’ rating
* CDOs made from low rated MBS
typically have higher interest rates due to
higher risk
‘BBB’ rating
Lowest rating
Goldberg, S. & Giedeman, D. Healing the
global financial crisis. The Journal of
Corporate Accounting & Finance,
September/October2009, 14.
6. Investment banks invest in these
securities
Riskier portions of
CDOs (lower ratings)=
higher returns
MBS
When the assets backing
these securities (houses)
are growing in value, the
securitized investments
also grow in value. The
investment banks were
making a great deal of
money with these
instruments. Many had
very little cash in their
reserves- they were
investing everything they
had.
7. Housing prices start to go down. Homeowners have houses where they owe more
than what they’re worth- start walking away &
defaulting on mortgages
DEFAULT ON
MORTGAGE
8. Mortgages are the collateral for
the MBS & CDOs- they too lose value
Defaulted mortgages
Quickly
lose value
as the
assets
backing
them are
losing
value.
9. Investment banks left with securities
divided up so many times they cannot figure
out original asset and their current value
10. Commercial banks left with defaulted
mortgages & investment banks left with
securities decreasing in value
Investment banks went from making
money off these securities when
housing prices going up. They did not
except housing prices to go down, but
when they did, all their securities and
investments plummeted in value
leaving them with little to no capital.
Assets- decrease in value/default
Any security being backed by that
asset- decrease in value