This, in turn, 2) brings more capital to the housing markets which means mortgages are more affordable for homebuyers. Securitization does two things really well: 1) It spreads out the risk of what is an otherwise very risky asset (a mortgage). Those with a higher appetite for risk may pick a Bbb rated tranche hoping for higher returns. Pension funds are required, for example, to be in only Aaa rated bonds and choose only the top tiers. Investors can then choose which tier to invest their money. The trust can sometimes be specialized so that certain tiers include just the highest quality MBS (those with the safest mortgages issued to the least risky borrowers) and others the lowest (subprime mortgages issued to those with less than stellar credit scores). The name given to these bonds that investors buy is mortgage-backed securities, or MBS for short.įinally, these MBS (each containing several hundred home mortgages) are further pooled together to form a “trust” that investors can buy into. As homeowners pay down mortgage principal early, refinance their mortgages, or default on their loans, the payments to bondholders fluctuate. Each month when families pay down their mortgages, that incoming cash is sent to investors who purchased bonds. Once these mortgages are pooled, they then issue bonds to investors using those assets as backing. Large financial institutions like investment banks or quasi-government agencies like Fannie Mae first pool together several hundred mortgages.

2 Today, almost 75% of mortgages issued are securitized.

The linkage between Wall Street and Main Street was, for the most part, established when the finance industry created securitization in the 1970s and was mass-commercialized in the 1980s by the now defunct Salomon Brothers. Why is Wall Street Involved with Home Mortgages In the First Place? And don’t forget to save us the aisle seat. So here is your cheat sheet for The Big Short, in three simple questions. Well, at least it’s better when you discuss the movie with your friends afterwards. The film is earning rave reviews and mentions of Oscar nominations, but it’s even better if you understand the wonky details behind the plot. Michael Burry, who is portrayed by Christian Bale in the movie, made $750 million in 2007 alone because of the bets he made. Their foresight helped them make gobs of money while Wall Street institutions crumbled. The big financial meltdown is finally getting its star turn on the big screen with the release of The Big Short.īased on Michael Lewis’s New York Times bestseller by the same title, the film tells the story of six contrarian traders who sniffed out the housing crash before virtually anyone else.

The big short online