Bank Vs Commerical Bank

Mortgage-backed securities are investments packaged by financial institutions for the secondary mortgage market. Investors are able to pay for shares in a bundle of mortgages, and they receive a yield when the mortgages are repaid. These investments tend to be used in a similar fashion as the 10 year treasury bond, and their rates move in tandem. Basically, if the 10 year bond is dropping, mortgage rates tend to do so as well--and vice versa.

In the 1980s, investments banks such as Goldman Sachs, Merrill Lynch, Bear Stearns, JP Morgan, and Morgan Stanley started selling mortgage bonds. Mortgage bonds were a collection of thousands of home mortgages, purchased from lenders, and their associated income streams (monthly payment). To address the fact that some homeowners often refinance their debt when interest rates are low which prematurely pays off the debt, mortgage bonds were stacked into layers called ‘tranches’. The lowest tranche represented mortgages to be paid off early, and the highest layer was the last mortgages to be paid off.

Rep. Barney Frank (D-MA) explains the old system of lending and the new securitization process. Matt Demon narrates how the home buyers repaid their loans to lenders, and consequently, the lenders sold the loans to the investment banks which combined the mortgage loans with other credit loans creating a collateral debt obligation a complex derivative. The collateral debt obligation sold to investors who paid the rating agency to evaluate the CDO's. The home buyers were now paying investors through this

Wells Fargo and other banks lend money to customers who wish to purchase or refinance homes. Once the transaction is complete, the customer owns the home, but the banks hold a lien position on the property’s title. If customers default on their mortgage payments, the banks begin the foreclosure process on the homes. When the foreclosure process is complete, the banks attempt to sell the homes at auction. If the banks are unable to sell the properties at auction, the homes are now bank-owned properties. Essentially,

The flow of funds within financial markets is stimulated by the money, bond and mortgage markets. A money market is the trading of highly liquid financial instruments with a duration of one year or less and includes the trading of Treasury bills. Furthermore, bonds are long term investments, with a duration greater than 1 year and are issued by corporations and the U.S. government. In addition, the mortgage market creates loans to finance the real estate market. Once mortgages are issued on a property, banking institutions securitize the mortgages and sell them on the secondary market (CSU Global, 2016). Due to the scale of these three markets they have an extensive impact on the monetary supply and economy.

Before the 1970’s banking was not a business that you went into to make money and it remained that way until Louis Ranieri came around. Louis Ranieri had one idea that changed the housing market forever. His plan was to have a mortgage back security. Mortgage back securities are an asset based security backed by a mortgage. For example, if you use your mortgage to start a business, your business is backed by that mortgage. The average mortgage loan has a fixed rate loan and takes thirty years to pay off, however, when bundling them all together it’s an opportunity to make greater profits. Mr. Ranieri believed these would still be less risky because people are more likely to pay their mortgages off.

1. The bank creates a pool of mortgages 2. Each mortgage in the pool is insured by a major agency (FHA, VA, FMHA) 3. The mortgage pool is sold to a trustee (SPV) at this point the mortgages are removed from the bank’s balance sheet 4. The trustee purchases GNMA insurance on the pass through bond payments 5. The Trustee issues GNMA pass through bonds backed by the insured pool of mortgages

If [a homeowner’s] mortgage is securitized, the original loan provider may “sell, assign, and transfer the mortgage loan to a ‘sponsor,’ which is typically a financial services company or a mortgage loan conduit or aggregator.” The sponsor then repeats this process, selling, assigning, and transferring the mortgage to a “depositor,” who sells, assigns, and transfers the mortgage to a trustee, “which will hold the loans in trust for the benefit of the certificate holders.” The trustee finally issues a mortgage backed security (MBS) with [the homeowner] and multiple other homeowners' mortgages, subject to a pooling and servicing agreement (PSA). A pooling and servicing agreement is a trust agreement “entered into by the depositor, the trustee,

Freddie Mac buys mortgages on the secondary market, pools them, and sells them as a mortgage-backed security to investors on the open market. They buy the mortgages from banks and savings and loan associations. This is designed to encourage more mortgage lending, a financial institution does not have to wait for the loans to be repaid, or rely on deposits made, to have the funds available to them to lend again. Freddie Mac’s business provides a constant source of mortgage funding directly to financial institutions, not individual consumers.

Simply putting, banks accept deposits from public; keep some of those deposits with them and lend the rest to businesses and individuals. Businesses and individuals in turn pay interest on

The complex process of securitisation has five stages to show the basic structure. The first step of the process starts with the commercial banks. The commercial banks are the originators of the loan since they decide to securities a part of their loans. The following step is the aggregator buys loans from one or more originators which then means that the aggregator can sell the loans to a multiple amount of buyers. The third step is when the loans that have been sold to many buyers are sold off to the

The banks then created a new idea—linking investors to homeowners through mortgages. Ordinarily, a mortgage broker would connect a house-buying family to a mortgage lender, who would then supply them with a mortgage. In this system, everyone is happy—the mortgage broker earns a handsome commission, the mortgage lender earns a new mortgage, and the family is now a homeowner in a market of increasing housing prices.

Countrywide’s tactics often led borrowers to expensive and sometimes unfavorable loans that resulted in richer commissions for Countrywide’s sales forces, fees to company affiliates providing services on the loans, and a roaring stock price that made Countrywide executives among the highest paid in America. Countrywide’s entire operation, from its computer system to its incentive pay structure and financing arrangements, was intended to wring maximum profits out of the mortgage lending boom no matter what it cost borrowers (Morgenson, 2007).

Housing prices in the United States rose steadily after the World War II. Although some research indicated that the financial crisis started in the US housing market, the main cause of the financial crisis between 2007 and 2009 was actually the combination of housing bubble and credit boom. The banks created so much loan that pushed the housing price to the peak. As the bank lend out a huge amount of money, the level of individual debt also rose along with the housing price. Since the debt rose faster than people’s income, people were unable to repay their loan and bank found themselves were in danger. As this showed a signal for people, people withdrew money from the banks they considered as “safe” before, and increased the “haircuts” on repos and difficulties experienced by commercial paper issuers. This caused the short term funding market in the shadow banking system appeared a

In relation to the increase in house’s price, the rise of financial agreements such as mortgage-backed securities (MBS) and collateralized debt obligations (CDO) encouraged investors to invest in the U.S housing market (Krugman, 2009). When housing price declined in the U.S, many financial institutions that borrowed and invested in subprime mortgage reported losses. In addition, the fall of housing price resulted in default and foreclosure and that began to exhaust consumer’s wealth and