Bubble Popping Profits
In one of my earlier posts, which I doubt I will ever find, I questioned if in the securitization process the financial institutions were taking a big chunk of money by repricing debt that the debtors were supposed to be paying say 10% on and selling it to investors at a certificate rate to yield say 5%.
This is a very simple example, but the math is utterly shocking on this. If you loan $100k at 10% and then sell it to yield 5%. To the debtor payments would be $877.52. At 5% a person could borrow $163,461 and have the same payment.
So, what I was wondering, as in this example, were the investment banks skimming off $63k by selling what cost them $100k to loan for $163k, as in this example. If the spread was smaller, the difference would be small.
Well, this article makes me think that what I question was actually happening.
"Although market interest rates were low when these mortgages were written, the mortgages had rates averaging 11.2 percent. Yet investors who put up most of the money were willing to accept a floating rate of just 30 basis points — three-tenths of one percentage point — over the London interbank offered rate. At the moment, that gives them a yield of 3.2 percent."
That they state the rates being charge were high, and the investors were getting a low rate, well, I still wonder if this was happening. I guess the alternative is that they skim the difference in interest rates every month, but that would mean that there would be a promise of enormous continuous income streams coming in, and I haven't seen any thing to suggest a relatively passive continous income stream for the long term with no capital cost associated to it. I tend to think they were reselling the debt re-priced to give a certain yield and taking an enormous front loaded profit from investors. Even a 1% spread would give the bank about at 12% face value up front bonus.
This is an enormous amount of money not available for banks to earn anymore regardless of how mortgages were securitized. It is either an enormous loss to how they earn profits up front, or an enormous hit on long term income streams that no longer exists with the housing bubble popped.