The Financing Of Mortgage Bonds

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In the 1980s innovation was added to the traditional old bond. A bond was basically a promise (from government or corporation) to make interest payments on borrowed money, and, to eventually pay back the borrowed money. For generations, financial markets traded bonds in this way. Given that a bond was an income in a way based on borrowed money, Wall Street, in the late 1980s decided to create “bond-like” financial products from other debt-based income like credit cards, student loans, and most importantly in this case, home mortgages. The “mortgage bond” was created and became a financial product that was bought and sold by Wall Street investment banks. The mortgage bond would collect many home mortgages, purchased from lenders, and…show more content…
They enticed these customers by creating a new type of mortgage- variable rate, with low to zero initial interest rates, which later reset to higher levels. A large number of Americans took on these mortgages not realizing the real estate trap they were getting themselves in caused by their own actions. In the 2000s, as the mortgages became lower quality, Wall Street’s mortgage bond became even riskier. This should have made them more difficult to sell to investors because it would affect their ratings since riskier products should have lower ratings. However, the conflict was between Wall Street and the rating agencies since it’s Wall Street who pays these agencies. Likely because of this conflict, rating agencies assigned surprisingly high ratings for these ever risky mortgage bonds. Despite the boom in mortgage bonds, Wall Streets desire for more profits grew and led them to focus on the low ratings of the bottom (riskiest) tranches of the mortgage bonds. They came up with the clever idea to package the hundreds of different mortgage bonds together and on the principle of diversification, they could convince rating agencies to give them higher ratings as a whole. Instead of holding on to the mortgages and collecting monthly payments, local lenders started selling mortgages off to other financial institutions who packaged hundreds of mortgages
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