City Start Striving for Becoming a Rich Man

Chapter 702

“There are a lot of people here today, there are actually more people than last time.”

Ni Shixiao stood on the podium and said to the students below: “It seems that I did a good job last class, otherwise the number of people today will not increase, but should decrease.”

“Last class, I told you about the relationship between lipstick and the economy. In this class, I will tell you about the next loan, especially the subprime mortgage of American.”

Ni Shixiao turned around and wrote the words “Subprime Mortgage Crisis” on the blackboard.

“Some people may be surprised. I’m talking about subprime mortgages, but why write the subprime mortgage crisis on the blackboard? If you have this question, don’t worry. I’ll talk about it after listening to my lesson.”

“I won’t talk about the meaning of subprime mortgages here. If you don’t even know what subprime mortgages mean, you can’t sit here and listen to classes. Our century-old Yanda University, there should be no such waste, maybe Huaqing will have Such a waste, who knows!”

“Hahaha!” The students below all chuckled.

The grievances between Yan Da and Hua Qing have been accumulated for a long time!

Speaking ill of Huaqing in Yan University, or speaking ill of Yan University in Huaqing, is a matter of political correctness.

“Although everyone has not entered the society, they should be familiar with loans. For example, if you go to the bank and hope to buy a house with a loan, the bank will check your credit history. If your credit history is good, the bank will most likely accept your loan application. ”

“But if your credit history is bad, the bank will definitely not accept your loan. Then there is a big market demand, so there will be subprime loans.”

“And why do banks provide loans to people with bad credit? Here we are going to talk about this background.”

“During the years from 2000 to 2006, American’s house prices have grown rapidly. Due to the high house prices, many families have difficulty paying the high cost of buying houses, and many have low incomes or poor credit records No one can get a home loan.”

“At this time, Emerald Kenzheng House is also putting pressure on loan companies, hoping that they can relax their loan standards and issue more loans to low-income groups for buying houses.

“In the financial environment of those few years, compared with the rapid growth of housing prices, the interest rate on the market has always been a very low state. Therefore, for loan companies, increasing loans may not be an increase in income. Method.”

“So, the loan company issued a large number of subprime loans.”(Read more @ wuxiax.com)

“Some classmates may say that the loan company is not a fool. What should I do if I can’t collect the loan?”

Ni Shixiao smiled and said: “Of course they are not stupid! They have their own solutions. They will follow this model to let you repay the loan.”

“In the first few years when you get the loan, you only need to pay about 1.5% of the loan interest rate each year, but after a few years, your loan interest rate will rapidly increase to a high level to make up for the previous years. Low loan interest rates.”

“In other words, in the first few years, your loan interest rate is extremely low, but in the next few years, your interest rate will be very high.”

“Why is it designed into this structure? Because the loan company believes that housing prices will not fall.”

“After a lender accepts the loan, the value of the house as collateral will increase more over time. So if the lender defaults due to high interest rates a few years later, the loan company only needs to take back the house as collateral. , And then sell it to make up for the loss and even gain!”

“The self-confidence of the fascination with housing prices has made American in the previous few years a bit crazy. You can imagine that a person who barely made a living with a very low income, walked into the loan company in the morning and did not need to provide more Guarantee, you can get a loan 100% to buy a house in the afternoon.”

“Here we need to understand a very key concept, no recourse. The non-recourse of a mortgage refers to that if the lender is unable to repay the mortgage, the loan company has no right to confiscate any assets of the lender other than the mortgaged property.”

“In the eyes of ordinary people, this is a very humane and humane design. However, this kind of perceptual design is not good for finance that requires coldness and rationality. Why? Because there is a loophole here!”

“For example, you took a loan of $1 million from the bank to buy a house five years ago, and now you have five years to repay, and the remaining outstanding loan amount is $700,000.”

“Five years ago, your house was worth 1 million U.S. dollars, but now the house price has fallen to 500,000 U.S. dollars, and there is no upward trend. Then, without recourse, will you continue to repay the mortgage? It must not be!”

“If you are rational enough, you will give up your property because it is worth only 0,000. You don’t have to pay off the remaining 700,000 debt for something worth 500,000.”

“So, if house prices plummet, many lenders will actually give up repaying their loans, directly leading to a huge increase in the bad debts of the loan company.”

“Are all the loan companies stupid? Will they not see the risks inside? Of course not. There are no people who can survive on Wall Street without their brains.”

“Then what approach did they adopt? That is asset securitization!”

“The credit ratings of subprime loans are basically comparable to junk bonds, but asset securitization has given them the opportunity to dig gold from junk. Loan companies put all subprime loans together in a package, and then put the future The cash flow received forms a waterfall.”

“Everyone, look at the blackboard. On the blackboard is the waterfall I drew.”

“In this’waterfall’, we have generated three types of assets, high-level assets, intermediate assets, and low-level assets. In the future, the cash flow obtained through subprime loans will first ensure that the benefits of high-level assets are realized, and then the intermediate level. Assets, and finally low-level assets.”

“Therefore, high-level assets tend to have the lowest yields, but also the lowest risk, followed by medium-level assets, and low-level assets that are the most dangerous.”

“Why do you want to classify this? Because the loan company wants to package and sell subprime loans to obtain cash and transfer risks. It is not difficult to find that due to the existence of packaging and slicing, we can artificially create AAA-rated assets.”

“And the liquidity of this kind of high-credit-rated assets in the market is very high, and many investors tend to buy it. Therefore, for loan companies, this kind of package sale method makes it magical. Gold was made from the trash and sold.”

“Medium-level assets are often manufactured into BBB-level products with low liquidity. Low-level assets often have no credit rating and are difficult to sell.”

“So what to do?”

“The solution for the loan company is to continue to repeat the steps of asset securitization, continue to securitize on the basis of asset securitization, so there is the square of CDO.”.

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