What's a mortgage backed bond worth?

The Virginian ^ | 4/2/2009 | Moneyrunner

[moneyrunner]

Mortgage backed bonds have a problem. No one is willing to buy them except at a huge discount to their intrinsic value. This is often referred to as a liquidity problem. The liquidity problem is partly the result of being unable to determine the value of modern mortgage backed securities.

Mortgage backed securities are bonds that are backed by a pool of mortgages, and there are trillions of dollars in mortgages.

We never know ahead of time exactly how many people who buy a house will fail to pay the mortgage, but we have a statistical history that tells us that under ordinary circumstances, in times past a certain percentage - call that “x%” - will go into default and the house will have to be repossessed and resold.

The problems began when lending standards were abandoned due to a combination of greed, stupidity and the ability of mortgage originators to sell the mortgages instead do holding them. If a mortgage company like Countrywide can create mortgages and sell them to someone else who bears the brunt of defaults, they can poison the entire mortgage market. And they did. They were aided and abetted by crooked politicians like Barney Frank and Chris Dodd, mortgage packagers like Fannie and Freddie, investment banks that demanded more and more of these profitable bonds, rating agencies that fell down on the job, and the liars who took out mortgages they could not afford.

So now what? What’s a defaulted mortgage worth?

Instead of getting technical, let’s get practical. ...

[RebelTXRose]

I work for an insurance company who bought in BIG to mortgage backed securities. (NO seconds & NO “B” paper)

Your statement about statistics of people paying their mortgage is correct. Altho the VALUE of the bonds decreased greatly - the monthly payments came in at 95% of the year before. We haven’t experienced being left holding the bag on non-performing loans. It’s been real sad to see what the PANIC driven crisis has done to the whole market.

[CRBDeuce]

Without doing any ‘fact checking’, one MBS (Mortgage Backed Security) is 3800 mortgages. The value of 3800 mortgages depends on the ‘value’ of each mortgage. 95% of them are probably ‘quite valuable’...we each can figure out what our own is valued at!

[moneyrunner]

Thanks for the validation. More HERE

[moneyrunner]

Even the mortgages in default have a value somewhere above zero; probably more than 30%. So the package is very valuable and can be bought at a fraction of its real value.