Word: markets
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Dates: during 2000-2009
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...example, many Mortgage Backed Securities ("MBS"), a species of ABS, became toxic following the collapse of the housing market. Like all ABS, MBS derive their value from underlying loans, in this case, mortgages. A large group of mortgages provides the payment stream to the holders of ABS in the form of individual interest and principal payments made by a borrower to the bank...
...result of declining home prices, if a borrower defaults on their mortgage, market prices for the home would be less than the balance on the mortgage. However, since MBS derive their value from a pool of loans - typically thousands of individual mortgages - the default of some portion of the mortgages would not mean the security had no value, only a reduced value. Unfortunately, banks, in an effort to increase their investment returns, exacerbated the problem by using enormous leverage to purchase and securitize mortgage loans. Thus, even if MBS's value declined because of defaults, because...
...last tranche to be paid. In order to compensate for the increased risk, the more junior the tranche is, the higher the yield on the investment. Employing this system, loans that individually had varying credit ratings were bundled and tranches were created that were then sold in the secondary market...
...Nonetheless, despite these obstacles, TALF could succeed in restoring the secondary market for ABS. Although rating agencies have yet to demonstrate that they can accurately assess the credit risk of these instruments, changes in the economy or regulatory action could alter this perception. And in the secondary market, buyers' concerns of ABS resold by investors may be mollified by their ability to secure relevant data on the underlying assets. For home loans, which will be eligible for securitization in future versions of TARP, this data could include the average FICO score of the borrowers, location of the property, the loan...
...TALF can reestablish liquidity for ABS in the secondary market, it is likely that investors, including hedge funds and private equity funds, could make a great deal of money. That could cause the public to question why a wealthy financial manager makes millions of dollars from the arrangement while the taxpayer gets very little. That may very well stir memories of excessive AIG compensation in a year or so. Ironically, the success of the secondary market may pose the greatest threat to its revitalization...