Quick issue about the global credit crunch

[bergers_n_fries]

hello im currently doing an assignment on the aud vs usd, the reasons for the decreases etc etc

i thought it would be good to mention to global credit crunch etc however ive stumbled upon an issue that needs clarification

i was reading an article from radio national on the abs and have cut out a specific portion that needs explaining to me

"The global credit crunch stems from a few million dodgy mortgages in the United States, which were bundled up into bonds and securities and sold around the globe.

As a result, the market for residential mortgage backed securities has dried up and banks can't raise money for new lending".

i understand the mortgage problems, but how can something like a mortgage be bundled up into bonds/securities is my issue??

thanking you in advance

 

[skyQuake]

In a process called 'securitisation', the mortgages are bundled up and sold to investors (usually institutional). ie. Since a mortgage is just a cashflow in essence, it might as well be a bond. Securitization takes a whole heap of mortgages and sells them just like issuing a bond to meet current cash flow needs. By combining the mortgages, credit risk is reduced (in theory) so they're given better credit ratings. Its sold in tranches of quality but don't worry about the details.

 

[c-unit]

Yeah, just think of it as throwing a whole heap of mortgages into a big pool and splitting it into small pieces, then selling these peices on to investors (mostly banks in this case). That's how I think of it anyway.

 

[bergers_n_fries]

In a process called 'securitisation', the mortgages are bundled up and sold to investors (usually institutional). ie. Since a mortgage is just a cashflow in essence, it might as well be a bond. Securitization takes a whole heap of mortgages and sells them just like issuing a bond to meet current cash flow needs. By combining the mortgages, credit risk is reduced (in theory) so they're given better credit ratings. Its sold in tranches of quality but don't worry about the details.

so an institution buys all the mortgages collectively and therefore receives all the interest payments etc etc???

sorry if that is a really dumb question

 

[Glen48]

Place like Iceland were offering a higher % return so Super funds and Local Council decided 15% return was better than what others were offering. Once again if it to good to be true...... wait for the next bubble to start and away we will go again. History is the only thing we don't learn from.

 

[bergers_n_fries]

Yeah, just think of it as throwing a whole heap of mortgages into a big pool and splitting it into small pieces, then selling these peices on to investors (mostly banks in this case). That's how I think of it anyway.

so other firms use the repayments on mortgages to place into other ideas say..the icelandic 15% interest example???

 

[nioka]

I have just found the real reason for the present crisis. The heads of the famous G7 can't count. On a news item I have just read it shows a photo of the heads of the "G7" AND THERE ARE EIGHT OF THEM IN THE PHOTO.