The Financing Of Mortgage Bonds - 3425 Words

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 â€Å"bond-like† financial products from other debt-based income like credit cards, student loans, and most importantly in this case, home mortgages. The â€Å"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 m ortgages 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 mortgagesShow MoreRelatedObtaining Capital For Expansion Into New Markets904 Words   |  4 Pagesfunds from external sources. The ways in which company chooses to obtain these funds depends upon the short-term versus long-term financing strategies of the company. As a finance manager for a Fortune 500 company, the plan is to borrow approximately $100 million within the next year, and the manager must present to the board the best option for this large financing. By evaluating the different types of funding options, the finance manager can make the best informed decision for this capital fundingRead MoreLong-Term Financing Measures1334 Words   |  5 PagesFinancing Financing comes in different forms and is issued for various reasons. It also comes with different processes and requirements and is stated in different ways. Some financing is secured by company assets where some is unsecured and only backed by unpledged assets in the case of default. Long-term financing measures can range from 10 year to 30 year pay back periods. A mortgage is a form of security against a loan given in advance. The mortgage loan is a term loan secured by the mortgagedRead MoreNorth West Company Incorporation937 Words   |  4 Pagesfinancial/economic obligation of company lasting over years. This includes any financing or leasing liability that has a fixed interest rate and is to mature in more than one year. Unlike short term loans, long term loans are paid in full at maturity. Long term debt includes debentures, leasing, and Note payable (long term), bonds, deferred tax liability, mortgage loans and pension liabilities etc. a) Debentures: a debenture is an unsecure bond certificate that does not hold any claims on assets of firms. InRead MoreFinancial Disintermediation1396 Words   |  6 Pagesbe more sensitive to changes in asset prices. In financial systems that rely less on arm s length transactions, firms appear to be better able to smooth investment during business cycle downturns, as they are better positioned to access external financing based on their long-term relationships with financial intermediaries. However, when faced with more fundamental changes in the environment that require a real-location of resources across sectors, financial systems with a greater degree of arm sRead MoreThe Financial Crisis Of The Decade1364 Words   |  6 PagesThe financial crisis of the decade is considered the largest and most severe compared to the Great Depression. The crises reshaped the financing and investment banking business not only in the United States but globally. The top largest banks have fal len due to the losses they have incurred in connection with their investments in the subprime mortgage markets. (Financial Crises 2007-2008 Overview) Governments had to come up with some solutions in order to further avert the decline of their countryRead MoreLiars Poker Analysis1231 Words   |  5 Pagesprinciple that led Michael Lewis to write this book. The book portrays Michael Lewis’ time with Salomon Brothers (SB), the largest bond dealer in the 1980s. It outlines the business model that SB used to maximize capital in the mortgage bond market. By the mid- 1980’s SB had become the most influential bond dealer in the market. However, there prominence as the top performing bond dealer was short lived and subsequent events led Michael Milken to take over their position as early as 1987. Even though SbRead MoreEssay on Buy or Sell1727 Words   |  7 Pagesrecouping the cost. While the benefit of building equity is certainly valuable, the Lintons will be financing with an interest-only loan for the first five years, which means that the only way they will gain equity is though profits of the sale, if the value of the home increases over their intended ownership period. There are other benefits of buying, such as the tax break on both the mortgage interest and property taxes. On the contrary, there are also risks associated with buying a home thatRead MoreFinancial Analysis642 Words   |  3 Pagesinterest expense) by total assets. Return on assets can be compared to other returns with similar or different risk profiles. For instance, if your business is only returning 4% annually (after tax) compared to, say, a 6% yield on a junk municipal bond, one could conclude that the business is under-performing for the risk taken by having all assets tied up in an non-liquid privately held business – its own. If few would accept such a low rate of return in general, particularly considering the riskRead MoreManaging The Global Financial System1025 Words   |  5 Pagespractice in the financial global system of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations (or other non-debt assets which generate receivables). These types of debts, along with their rights and obligations, are sold with their related cash flows to third party investors as securities. These securities may be bonds, pass-through securities, or collateralized debt obligations (CDOs). Then, investors to whom theseRead MoreHealth Care Essay774 Words   |  4 PagesApril 1, 2012 Organizations that decide to issue bonds generally go through a series of steps. Discuss the six steps. These are the six steps that organizations use when they are issuing bonds. These steps are: 1. â€Å"The healthcare borrower updates its capital plan, measures its debt capacity and attempts to get its house in order† (Zelman, McCue, amp; Glick, 2009) 2. â€Å"The healthcare borrower selects key parties involved in the bond issuance† (Zelman, McCue, amp; Glick, 2009).