Interesting description of
Interesting description of how the "securitisation" of mortgages that preceded the Crash of 2008 worked in this book published a couple of years ago by Corporate Watch:
Quote:
Unlike traditional mortgage lenders, investment banks didn't have deposits that they could use to make mortgage loans. Instead they invented a new technique called mortgage backed securitisation (MBS). They borrowed money by issuing bonds secured against the expected repayments on the mortgages.Bassically, this works as follows:• The mortgage company, with its arrangers and lawyers, sets up a kind of paper company called a 'special purpose vehicle' (SPV).The SPV issues a bond, promising to pay interest to the bond investors who buy it.As the mortgage borrowers pay back their mortgages over, say, the next 30 years, the company will pay the money into the SPV.So long as the money paid out to the bond investors is lower than the money paid in by the mortgage borrowers, the SPV is in surplus. The mortgage company keeps the difference as its profit – after paying out cuts to the banks that arranged the deal for it, the lawyers who wrote up all the complex SPV paperwork, any insurers who underwrote the deal, etc (page 27).
Surprising too since the author seems to be a bit of an anarchist and fan of David Graeber who does endorse the crackpot view that financial institutions can create money out of thin air to lend and then charge interest on it. Anyway, the author clearly recognises that these companies had to borrow the money to give mortgages. Incidentally, this practice has now spread to financing car loans and credit card loans where it is even more obvious that the finance companies involved can't have just conjured up the money they lend.