[owen] I got plenty of nothing

[joshbelbeck at comcast.net]

The investment vehicle, or security sold that are pools of commercial and residential mortgages are called "REMIC"s

http://en.wikipedia.org/wiki/REMIC

It's a comlex bond market and a securities shell game.  Mortgages get bundled as a REMIC type security, the bank then gets to move that mortgage off their balance sheet, freeing up more cash to do the exact same thing again and again.

They also have tax advantages.

Here's a long article about how they make money:
http://www.fanniemae.com/mbs/mbsbasics/market/yield.jhtml?p=Mortgage-Backed+Securities&s=Basics+of+Fannie+Mae+MBS&t=Basics+of+MBS+Market+%26+Pools&q=Understanding+Yield

or

http://tinyurl.com/3pwszm   if the other link is to long.

Perhaps I made it more confusing. :D

Josh
 -------------- Original message ----------------------
From: "Steve Owen" <saowen at TarrantCounty.com>
> All right, there are a couple of relatively smart people on this site
> who maybe can enlighten me about our economy.  I am smart enough to know
> that I have no clue what is going on regarding the Dow tanking 500
> points today.  Here is what I think I know - please tell me where I am
> wrong, or why, if I'm close to correct, other people are stupid enough
> to have put us into this fine mess.
> 
>  
> 
> 1.	Joe and Mary Borrower take out a mortgage on a house at 5-8%
> interest, depending on their credit risk and other variables.
> 2.	The company that writes the mortgage gets an up-front fee, out
> of the closing costs or somewhere.  The individual loan officer who did
> the deal gets a commission, out of the closing costs or somewhere. 
> 3.	The mortgage company then sells the mortgage to Fannie or
> Freddie.  Does the company make an additional profit at this
> transaction?   Does the mortgage company retain any of the risk if the
> Borrowers default in the future?  If not, then what possible reason did
> the company have to do due diligence on the qualifications of the
> Borrowers?  Did Fannie/Freddie exercise any independent analysis of the
> strength of the loan, e.g., whether the Borrowers had a realistic chance
> of paying the loan, or was the property competently appraised, etc?
> 4.	F/F then "bundle" a bunch of these mortgages into some form of
> an investment vehicle and sells them to the big banks.  Where do F/F
> make their money?  If the original mortgage loan was only 5-8%, and it
> has now been resold twice, what is the residual maximum return to the
> banks?  Wouldn't the return be less than the interest on the original
> mortgage?  Given that, in the best scenarios, there will always be some
> defaults, that rate of return seems relatively low. Not worth the
> trouble for a big investment.
> 5.	Wasn't there anyone in the higher echelons of the big banks who
> was aware that a lot of the mortgages were just plain stupid - interest
> only, ARM, lack of proper credit documentation or income information
> from the lenders, inflated appraisals, etc. that just cried out for
> rampant defaults?  Or did they remain in denial because all this
> activity for a few years boosted stock prices enough to result in
> obscene executive annual bonuses?
> 6.	Even though there are defaults and foreclosures all over the
> country, most people aren't in default - they are paying their notes on
> time.  Don't the big banks have enough other investments that aren't
> tanking so bad that can cushion the mortgage defaults?  Is every
> mortgage on every house in America "bundled" into one of the investments
> that are now tanking?
> 
>  
> 
> Chances are pretty excellent that I totally misstated a large share of
> the above.  I am really curious about what is going on and would like
> some enlightenment.  Please talk slowly and use small words.  Thank you.
> 
> 


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