Mortgage-Backed Securities Making A Comeback, Be Afraid, Be Very Afraid
The New York Times’ finance-loving Dealbook section ran a disheartening piece on Saturday. Not because there was anything wrong with the article, but because it noted mortgage-backed securities were becoming attractive investment opportunities again on Wall Street.
In case you don’t remember, these were the same securities that nearly brought the economy to its knees in 07/08. So why would investors want to go back to them?
The attraction is the price. Some mortgage bonds are so cheap that even in the worst forecasts, with home prices falling as much as 10 percent and foreclosures rising, investors say they can still make money.
This how it all started in the mid-90s. Wall Street bankers looking for new, secure revenue streams found they could package up home loans based on risk and sell them as a security. The interest on the loan would be the allure for the long-term buyer. The best loans in a mortgage-backed security (represented in the above picture as Sr. Secured) could in theory yield higher returns than a treasury bond, with just a bit more risk.
However, the idea rested on strong loan underwriting standards and increasing home values. When both sank, the loans went with them and brought down the mortgage-backed securities.
We already know we can no longer trust investors to do the right thing. They’re only in it for the money. This time we need to make sure they’re not packaging up crappy home loans, otherwise we’re just in for another crisis.
Paging Richard Cordray and the Consumer Finance Protection Bureau, please keep your eyes open.
