Subprime Credit

  

Categories: Credit

See: Subprime. See: Credit. See: Risk. See: Interest Rate.

Prime Credit: Good credit, quality borrowers.

Subprime Credit: Likely deadbeat borrowers who promise to pay...but don't.

Prime Credit: Low interest rates, low risk.

Subprime Credit: High interest rates, high risk.

Prime Credit: Fancy lunches at marketing events.

Subprime credit: Doggy bags on the street corner.

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Finance: What is Collateralized Mortgage...65 Views

00:00

Finance a la shmoop what is a collateralized mortgage obligation or

00:07

CMO all right people well this is a GMO and this is a CMO yeah it's a bunch of

00:17

mortgages in one investment vehicle pot like mortgage Stone Soup not nearly as [Mortgage stones in a bowl of soup]

00:24

exciting is that that man-eating plant over there

00:27

so yeah just a bunch of mortgages that are packaged together when banks and

00:30

investors package mortgages together well they can treat them like they're a

00:34

big fat indexed bond fund because these groups of mortgages while they pay

00:39

interest ie the interest comes from the people who are actually paying off their

00:43

mortgages so why would you collateralize a mortgage obligation anyway answer risk

00:49

by packaging lots and lots of mortgages together the theory was that well as a [CMO boxes on a conveyor belt]

00:53

whole they would create a much less volatile environment than the former

00:58

alternative of having tens of thousands of individual mortgages many of which at

01:02

any given time were you know in do rest as people were dead beating and not [Man playing video games]

01:07

paying what they promised to pay back right well collateralizing this group

01:11

meant simply placing all of them into one investment vehicle that could be

01:15

bought and sold as if it were in ETF or individual closed end fund but Wall

01:20

Street being Wall Street where greed is good until it's not abused the notion of [Boxing gloves punch collateralized]

01:26

collateralized mortgages and actually applied the notion of collateral against

01:31

them pledging as collateral the equity in these mortgages or packages of

01:37

mortgages and then borrowing against them so it's like leverage on leverage,

01:42

highly volatile and this is sort of like the brilliant idea of the fraternity [Man walking along]

01:46

social chairman sending the pledges to get graham crackers marshmallows and

01:50

chocolate when he sees his you know couch is on fire yeah like why wouldn't [People carrying snacks and a couch on fire appears]

01:54

he just put it out like what was he imbibing there all right well in fact

01:58

this is more or less what happened in the mortgage meltdown of 2008 and 9 and

02:03

it was helium inside of the couch that exploded in the form of many of these [Helium explodes on a couch]

02:08

mortgages becoming insolvent and as one mortgage went bad

02:12

well it caused a chain reaction of panic up and down the economic food chain

02:17

which resulted in the near bankruptcy of the United States financial system

02:21

basically the people who pulled together these CMOS forgot what the O stands for [Man walking along the street and plant eats him]

02:27

oh dear, oh my

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