Kế toán, kiểm toán - Chapter 1: Web extension 1A

Chapter 1Web Extension 1AA Closer Look at Markets: Securitization and Social Welfare 1Topics in Web ExtensionThe home mortgage industrySecuritization in the mortgage industry2Home Mortgages Before S&LsThe problems if an individual investor tried to lend money to an aspiring homeowner:Individual investor might not have enough money to fund an entire homeIndividual investor might not be in a good position to evaluate the risk of the potential homeownerIndividual investor might have difficulty collecting mortgage payments3S&Ls Before SecuritizationSavings and loan associations (S&Ls) solved the problems faced by individual investorsS&Ls pooled deposits from many investorsS&Ls developed expertise in evaluating the risk of borrowersS&Ls had legal resources to collect payments from borrowers4Problems faced by S&Ls Before SecuritizationS&Ls were limited in the amount of mortgages they could fund by the amount of deposits they could raiseS&Ls were raising money through short-term floating-rate deposits, but making loans in the form of long-term fixed-rate mortgagesWhen interest rates increased, S&Ls faced crisis because they had to pay more to depositors than they collected from mortgagees5Taxpayers to the RescueMany S&Ls went bankrupt when interest rates rose in the 1980s.Because deposits are insured, taxpayers ended up paying hundreds of billions of dollars.6Securitization in the Home Mortgage IndustryAfter crisis in 1980s, S&Ls now put their mortgages into “pools” and sell the pools to other organizations, such as Fannie Mae. After selling a pool, the S&Ls have funds to make new home loansRisk is shifted to Fannie Mae7Fannie Mae Shifts Risk to Its InvestorsRisk hasn’t disappeared, it has been shifted to Fannie Mae.But Fannie Mae doesn’t keep the mortgages:Puts mortgages in pools, sells shares of these pools to investorsRisk is shifted to investors.But investors get a rate of return close to the mortgage rate, which is higher than the rate S&Ls pay their depositor.Investors have more risk, but more returnThis is called securitization, since new securities have been created based on original securities (mortgages in this example)8Collateralized Mortgage Obligations (CMOs)Fannie Mae and others can also split mortgage pools into “special” securitiesSome securities might pay investors only the mortgage interest, others might pay only the mortgage principal.Some securities might mature quickly, others might mature laterRisk of basic mortgage is parceled out to those investors who want that type of risk (and the potential return that goes with it).9Other Assets Can be SecuritizedCar loansStudent loansCredit card balances10