To see what would happen, reporters for NPR’s Planet Money pooled their money and bought a toxic asset for $1,000. At 99% off, it seemed like a bargain. This week, “Toxie,” as they dubbed their pet, gave up the ghost. Contrary to expectation, she was killed not by foreclosures, but by loan modifications, which reduced the amount of cash flowing into the bond. Planet Money tells the whole story in this awesome and hilarious animation.
Toxie’s Dead [NPR] (Thanks to Brett!)
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Reporters Buy Up Toxic Assets
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I’m addicted to greed, but your assets are toxic…
I see what you did there.
Are we still bundling mortgages and selling them as securities? Hopefully no more sub-prime mortgages, but I have heard several stories implying that banks are heading back to their old way:
http://www.bloomberg.com/news/2010-09-23/jpmorgan-to-sell-commercial-mortgage-backed-securities-update1-.html
http://www.ft.com/cms/s/0/f82fb778-c7ef-11df-ae3a-00144feab49a.html
I might be alone here, but I think the whole idea of mortgage-backed securities is a bad one. Only a matter of time before we see more tribbles, I mean toxies.
Securitization of mortgages isn’t a bad thing in itself. It’s when you overleverage, try to sell them as high investment grade via purchase of insurance, keep the “off the books,” etc. that you lead to a problem.
Of course, remember that to 50%+ of the population, the mortgate crises was caused by people buying too much house and Fannie and Freddie. Since the bank’s activities had nothing to do with the crisis (they were just innocent pawns), they should be able to keep doing it, no?
I forgot that banks being forced to loan money to minorities and undocumented workers are the REAL cause of our entire financial collapse.
http://www.nationalreview.com/articles/225766/illegal-loans/michelle-malkin
http://minnesotaindependent.com/10758/bachmann-blaming-minority-lending-for-economic-crisis-does-not-mean-im-a-racist
Ahhh, Malkin and Bachmann. Those two are so funny I sometimes laugh harder at the things they say than I do at Stephen Colbert.
That would be because they aren’t, and you’re an idiot.
LOL. I think he was being sarcastic. I know it’s hard to tell these days since there are some people who actually believe this stuff.
true, My sarcastic radar fails me more and more often
The other big problem with mortgage backed securities were that they were often strategically bundled to exactly meet the minimum to get whatever score was needed to get them rated as A or whatever to get more for them. The scoring agencies weren’t exactly rigorous in vetting them when assigning scores, either.
I suspect that buyers now are doing considerably more due diligence, and going in with their eyes wide open.
Mortgage backed securities were at the heart of the financial crisis. It’s hard to explain, but NPR’s Planet Money has gone into detail in the past explaining them and their role in the financial meltdown.
And yes, they are still putting mortgage-backed securities together, but far, far fewer of them and generally consisting of much much safer assets.
In principle, securitizing mortgages is not necessarily bad. It’s a way to manage risk, and to finance mortgages. What was bad about how it had been done, was that low-risk mortgages with extremely high-risk ones. The theory was that the low-risk loans would temper the group. In practice it worked the opposite way … the high-risk loans poisoned the money-well.
What they will have to do, now, is manage the risk better; i.e. don’t make any high-risk loans and keep the overall risk both low and homogeneous. My bet is that they will be disciplined about it and keep that up for a few years … but eventually they will open the dam again and resume blending risk.
Sure, in theory mortgage backed securities are fine. BUT with the repeal of Glass-Steagall and the signing of Gramm-Leach-Bliley, and without the Volcker rule in the Financial reform bill, isn’t it just a matter of time before we have problems again?
So how did it die? Loan mods would reduce the income, but not eliminate it.
I laughed at the CUSIP on the headstone. Awesome feature!
From what I can gather from the article, it looks like there are various investor classes in this security, and as the loans which back the security are modified (reducing the income), the lower classes stop getting payments, and become worthless. They were class B-6, which was pretty far back in line, and why they were able to get the asset at 99% off. My guess is class A-1 is still getting larger payments, and they will be the last to get cut if it comes to that, likewise, class A-1 probably isn’t selling at 99% off.
Thanks. That actually explains a lot. I just watched the video, didn’t read the article (my bad.)
Yes, but at the time of initial sale, they were probably the same.
The friends of the banker got A1, the others got the lower classes…but I bet you they all paid about the same!
If you assume it, it must be true. You’re man who obviously knows what he’s talking about.
It seems likely this is a securitization of second mortgages or HELOCs.
Those are utterly worthless.
Tokie looks awfully familiar.
I think the Powerpuff Girls may have a trademark claim here.
There is minuscule similarity, like a weak parody, but not really.
Speak ill of Planet Money and you shall taste my sword!
(I love Planet Money. I want to marry Chana Joffe-Walt, even though I am A. already married and B. a girl.)
It’s not that similar:
Toxie is a creature. The Powerpuffs were little girls. Different.
Toxie has a bow in its hair. So do a lot of girls, so that can’t be claimed as a Powerpuff trademark even if it’s similar.
Toxie did not fly around like a super hero. Different.
Toxie did not “talk” as such, so different.
There is also a complete lack of any supporting elements (the professor, Mojojojo, etc)
Pokemon might have more similarity.
Completely made up. Considering how little mortgages get modified, there is very very little chance their’s got modified.
Orrrrrrrrrr you could go to their site and see for yourself. They showed their work, I’m guessing you have no proof beyond sweeping generalities.
Proof means nothing to those whose minds are already made up. This is why so many people “know” that Obama is a Muslim.
Sounds like such a scientific answer, but as my Math teacher always said…
Show me your work.
I’ll admit that’s the cutest toxic asset I’ve seen.
Anyone notice how their conclusion is that “toxie” caused the entire economy to collapse and an old guy with a dog is made out to be the bad guy when in reality if it hadn’t had a sub-prime mortgage it would be fine. The lesson here, boys and girls, is that the sub-prime loan is to blame and they only existed because some people decided to game the system which worked quite well for decades. That system said “If you can’t afford the payments, you don’t get a loan.” It’s pretty dead simple.
Of course, the people who convinced those who couldn’t actually afford to pay the loans back to take them out anyway are completely blameless, right?
Hmm lets see who’s more culpable, the experts whose job it was to lend to the subprime community and create toxic assets…or the laymen who were not paid to produce such loans and/or create whole new classes of risky assets.
Yeah, but the people who pushed these mortgages did everything they could to convince people it was ok, particularly young first-time homeowners or those who naively trust those who “know what they are doing” and assume that “This person wants to HELP me own a home, how AWESOME!”.
I have a friend who was dead-set on buying a house despite not really having the income for it. She looked anyway and was told over and over about how to fudge documents and records to make her income look larger. I kept asking if that was wise because I was scared she would get in over her head and not be able to maintain the payments. She had a child on the way and thankfully people convinced her that making such a big decision at that time was not wise. Once she had her daughter, the housing crash was becoming big news and we finally had a name for all those offers- sub-prime mortgages. Best thing she ever did was listen to the friends around her warning that this sounded really risky and that her frame of mind wasn’t entirely rational with the hormones swirling and telling her to nest. Now, she rents a perfectly nice home that she can afford and is better off for it.
I remember being told by a mortgage broker guy about this great new loan type that was interest only. It was so “cheap” with such low payments and would let me buy more home for my money.
It just seemed absolutely crazy to never pay down the actual debt.
afaik, the idea behind those kind of morgages is that they act as a temporary holding until you’re able to sell the house at a significant mark up. If house prices are booming, you can get one of those, pay the interest only for a year or two then sell the house with maybe 50,000 dollars profit depending on the value of the house (paying the morgage off with the rest of the money you get from the sale). You then invest that money in a slightly better house, take out the same morgage, etc until you get the house you actually want (bigger is always better of course!) and take out a regular type of morgage where you can pay it off, or the economy tanks and the price of houses stops rising, meaning you can’t sell the house to pay off the morgage as intended
Does anybody else find those Planet Money reporters (especially Alex Blumberg and Chana Joffe-Walt) just a little too smug, self-righteous, and condescending? Their massive oversimplification of complex financial/political/socioeconomic matters makes them sound like the junior high school Michael Moore Fan Club. I can’t help but reach for the dial when they come on. Or maybe it’s just me.
Sums it up quite nicely.
http://www.savethisnation.org/apps/videos/videos/show/2394707-mortgage-crisis-skit-pulled-from-snl
It’s a half hour podcast trying to convey complex situations in a way ordinary people can understand. And the video above is a three minute summary of something they spent several episodes reporting on over the last few months. Of course things are going to be simplified. Yes, perhaps sometimes it is oversimplified. But if you listen to their podcasts, they do a very good job at what they try to do, and do a lot of very good investigation.