Securitization: Why do banks make losses then?
“As unemployment rose during the Depression, many homeowners could not make their balloon payments, causing a wave of sales and foreclosures. The federal government stepped in, creating the Federal Housing Administration (Fannie Mae) to insure long-term mortgages, and the Home Owners Loan Corporation to sell government-guaranteed bonds to purchase non-performing mortgages. This was the beginning of the securitization that is a central feature of today’s mortgage market; lending risk is passed on to investors in mortgage-backed bonds rather than being held in the institution that originates the loans.”
So how much exactly as a rough % do banks sell as Mortgage Backed Securities and if the risk is being passed on to investors why exactly are the banks racking up such huge losses? Any help is greatly appreciated.
It varies. You’d have to look at the financial statements from a given bank to determine how much they sell and how much they keep.
For example, Washington Mutual, which is in BIG trouble financially, had a habit of making loans that other lenders would be afraid to make. As a result, they were able to charge a somewhat higher rate of interest than if they were making better quality loans. But when the loans went bad, they got hurt.
Best of success.
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