Yes, that's correct.
CDO’s backed by mortgage obligations are backed at the end of the day by real estate..
You bet.
real estate that is not remotely worth in general what was loaned for it....
Depends on the CDO.
The people buying the CDO’s weren’t interested in the real estate, all they wanted was the payments..
Correct. If they wanted real estate instead of a stream of payments, they'd have bought real estate.
well guess what? Those payments aren’t coming and the “collateral” backing those debt isn’t remotely worth what the payment promises they bought into said they were.
Depends on the CDO.
A CDO at the end of the day is the purchase of a debt obligation
You bet. Just like your individual mortgage is a debt obligation.
Let me know when you figure out that a derivative is different than a debt. Why not use the example of an option from the CBOE? Explain how that's debt. Take your time.
Todds, let me know when you figure out what derivative means... here’s a hint.. the ROOT of the word is “DERIVE”
Where do you think the value of a derivative comes from?
The only value a derivative backed by mortgage or other loans come from are the CORE value of the asset tied as collateral. Which is why when you unravel most of these bundles, you find there really isn’t much real value behind any of it. There are IOUs that if paid on time and in full may add up to 3 or 4 or more times the face value of the asset backing them, over the entire life of the loan, but the core value is only what the asset can sell for today.
And most of the sub prime (hell most of the mortgage loans made in the last 5-7 years across the board) were for more than the underlying asset is worth when it needs to be liquidated, particuarly rapidly. And that’s not even taking into account the declining housing market. Which nationally we have going on right now.
I know its hard, but THINK ABOUT IT... don’t just regurgitate your 101 stuff, but think about it. A house is worth 100k, thats the price it will bring at market.... a loan is written to ensure total payments of say 350-400k over 20 or 30 years for the stated asset. So that transaciton just created an overall debt obligation or 3-4 to 1 of the real value of the asset under it.
This is fine and dandy for a long term note holder, who actually loaned the 80k for hte property, requiring the buyer to show up with 20k to get the loan. If the buyer keeps to the payment plan, they get their 350-400k over the lifetime of the loan for an initial outlay of 80k... they are protected in that if the buyer doesn’t pay, they get the house bac at a value that sould at least make them whole again.
Now, change the scenario.. buyer buys the 100k property with 0 money down, and agrees to pay 400-450k over the next 20 or 30 years in the mortgage. thats transaction just created a 4+ to 1 debt obligation based on the value of the asset. However the risk of default and protection should it default is now much higher and pronounced.
Now, broker A bundles a bunch of these togther, and markets them saying you’ll get an X% return on your money on this bundle. Hedge fund or other player coughs up the cash to purchase these loans.... USUALLY with highly leveraged money as well. IE, say a 1 Million dollar purchase, may have actually only required 10% of the hedge funds direct money, and the other 900k is borrowed from the bank at some interest rate that ensures 1.8 or 2.7 Million be repaid for it over some amount of time using the loans themselves (CDO) as collateral. (another multiplier of 200-300% on top of the initial 4+ times the original loans were written as
Now, bank that loaned Hedge fund money to buy these mtgs, can now bundle these loans, and sell them to another lender or institution, based on the value of their loan repayment.. and claim that this loan is Collateral backed, as the loan they made originally was backed by the mtgs etc etc etc...
This layering continues until you wind up where you are today, with 1 real dollar of asset backing 20-30 times that much in debt obligation payments.... and guess what? The ponzi scheme falls appart and the whole thing unravels.
You cannot eliminate risk when you loan money... you can diversify to minimize exposures, but loaning money as well as borrowing money has inherit risks. When you wind up with 20 to 30 times the amount of debt obligations as you have real assets supporting them, you’ve left all reality and the idea you have collateral backing you to protect you is just plain laughable.
This is where things are right now, its why folks can’t even effectively tell what and how much their eposure is, because there are so many levels removed from the actual asset at the base of the pyramid, they have no idea what they spent money to buy.