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The www.FedPrimeRate.com Personal Finance Blog and Magazine

Sunday, November 07, 2010

The Life and Death of A Mortgage-Backed Security

The Life and Death of A Mortgage-Backed SecurityListened to a great episode of the NPR radio program This American Life earlier today. Truly excellent. The show was about the life and death of a mortgage-backed security (MBS), which was given the innocuous nickname "Toxie."

Basically, a group of Planet Money reporters pooled their money to buy a bond backed by mortgage debt. This is same type of investment that caused the financial crisis of 2008 and the global recession that followed.

5 reporters contributed $200 each, and bought the mortgage bond for $1,000. During the housing boom, that same bond was worth about $75,000! The investment -- essentially a big pile of paper drawn up by lawyers -- actually does OK for a while, producing a stream of income in the form of a monthly check. Eventually, however, the monthly checks dry up, and the MBS dies. In total, the investment returned $449.06, so the MBS ends up losing $550.94. Each of the five reporters gets back $89.80 from their $200 contribution. Ugly!

The reporters decide to invest what they have left in a gold coin. Much smarter, considering how gold has been doing since 2008. Moreover, the Fed just announced a new round of quantitative easing: printing new money out of thin air to buy Treasury securities. These purchases will, among other things, weaken the dollar, and will very likely contribute to gold's rise.

To read more about this episode of This American Life, and to download the free MP3, visit this link. There's also a fascinating interactive timeline here. Highly recommended!

Toxie's Dead from Enkhtulga on Vimeo.

Here's a cartoon we made for NPR's show, Planet Money. It's about Toxie, a personified toxic asset that helped burst the housing bubble. enjoy!

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Anonymous Nile said...

Gracias on the video, that explained a lot. See, I don't like reading through long sentences and when you had the video, I just clicked on it. Thanks for explaining about the life and death of mortgages. Really helped a lot.

Wednesday, November 17, 2010 1:40:00 AM  
Blogger perdido said...

hey I used to read your old blog - r u still blogging on that one if so can you add me? thanks!!! smokyblu@yahoo.com

Friday, November 19, 2010 3:10:00 PM  
Anonymous sunken said...

Well done explanation. Gold has certainly made great strides in the past year or so. But like any commodity out there, it can fall just as quickly, so it's risky either way, but it is safer than mortgage debt.

With foreclosures and defaults, it would seem to be common sense that return on investment would be rare.

Got to love the creative side of people who take a bad thing and turn it into a cute video subject. As an artist, I get a kick out of such things.

Wednesday, December 01, 2010 3:28:00 PM  
Blogger Steve Brown said...

@ Sunken: Whenever the Planet Money folks produce something with the This American Life team, it's always great. It takes real talent to make such a dull topic fun and interesting. Gotta' love it when learning is fun. Yep.

Wednesday, December 01, 2010 3:41:00 PM  

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