Booyah Breakdown: MBS 101
Well, what if he doesn't? What if he was a subprime borrower, turned deadbeat?
The individual or fund who bought the security won't get its payment stream.
So what does that investor do?
Well, on one hand, that risk is part of the game. On the other hand, he could go back to Local Bank and request that it cover the loan.
Now the bank does have some money set aside for defective loans that it could give to the investors. But the defaults are coming faster these days, and that reserve has run out. So now the bank's losses begin to mount, its stock price falls, and its profits are gone. "In addition, the bank now has no access to cash to fund new loans and sell them, so their business model no longer performs," says Keith Gumbinger, vice president of HSH Associates of Pompton Plains, N.J., which tracks a variety of loan products. So now both the banks and the MBS investors are suffering. But the banks get hit from both ends when they're in the subprime world. That's because many times the banks that offer subprime loans aren't able to sell those loans, notes Mark Grinis, a partner in Ernst & Young's real estate, hospitality and construction group. So our Local Bank bears all the risk of those loans. And these days, that's not such a good thing. OK. So that's a very simple run-through of the mortgage-backed security world. Whew! I'm sure you'd much rather go back to talking about Anna Nicole right about now.Select the service that is right for you!
COMPARE ALL SERVICESAction Alerts PLUS
TRY IT FREEJim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
Product Features:
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Dividend Stock Advisor
TRY IT FREENew! $49.95/yr
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
Product Features:
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Stocks Under $10
TRY IT FREEDavid Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.
Product Features:
- Model portfolio
- Stocks trading below $10
- Intraday trade alerts
- Weekly roundups
Real Money
TRY IT FREE24/7 market commentary from Jim Cramer and 20+ veteran Wall Street gurus. Get access to the latest trading ideas on stocks, options, and ETFs as well as a real-time forum to see the pros exchanging their investment ideas.
Product Features:
- Jim Cramer + 20 Wall Street pros
- Intraday commentary & news
- Real-time trading forum
- Actionable trade ideas
Real Money Pro
TRY IT FREEAll of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
Product Features:
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Options Profits
TRY IT FREEOur options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
Product Features:
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV