Re: Why would a bank lend on a mortgage? - Posted by Frank Chin
Posted by Frank Chin on January 31, 2011 at 18:16:48:
Investors in Ginnie Maes and Ginnie Mae unit trusts collect market rates on the instruments based on the term and risk.
If a loan was made at 4.3%, the mortgages are then aggregated into a syndication, and if interest rates rise, then a Ginnie Mae sold at par of $25,000 would fall in value. Conversely, if interest rate goes down, the par value would go up.
In other words, you’ll always be collecting interest at the market rate, at the time of purchase.
It is true if you bought the paper at par, held it for the entire 30 years, yes, you’ll be collecting 4.3%. However, the mantra these days is trading, so these instruments are actually bought and sold out on the open market, where money is actually made on trading, and not on holding.
One of the myths of these mortgage instruments is because they are backed by semi-governmental organizations such as Fannie Mae, and then these mortgage packages are further “insured” by organizations such as AIG, nothing can’t go wrong with it.
In actuality, that is far from the truth.
But you saw Fannie Mae, Freddie Mac, and AIG all about to go down the drain before the government came in, with it’s ability to print money and pulled their butts out of the fire.
I agree with you, in the zeal to promote home ownership, with little or no down mortgages, even bad credit risks are showered with loans, and with exotic credit instruments created to mask over the risks, it’s almost like trying creating something out of nothing.
I was reading about Ireland recently where excessive capital flows to “property development” created a nation of ghost towns.