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This article defines mortgage-backed securities and discusses their role in the financial crisis of 2007–2008.

Mortgage-backed securities are tradable investment vehicles made of groups of mortgages that offer interest payments similar to bonds.

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Mortgage-backed securities nearly brought down Wall Street in the early 2000s.

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What Is a Mortgage-Backed Security?

Many homeowners think of their mortgage in personal terms. But when grouped together, mortgages represent an investment class that investors—particularly investment banks—trade for profits. 

Mortgage-backed securities are groups of mortgages and other real-estate debt that are bound together by banks and then sold to investors. They act like bonds in that they can be bought and sold and offer periodic interest payments to their holder. 

Packages of mortgage-backed securities, or MBS, were the catalysts behind the Financial Crisis of 2007–2008, when the mortgage-backed security market imploded from subprime mortgage defaults, sending financial markets into crisis mode. In the years following, the U.S. government added regulatory measures to ensure these investments were less risky, which we’ll discuss in more detail below.

How Are Mortgage-Backed Securities Created? By Whom?

It all begins with an authorized financial institution, like a bank, credit union, or other type of lender, who is known as the originator. They sell assets, such as mortgage loans, to an issuer, such as another financial institution or the U.S. government. The issuer then securitizes these loans by pooling them into interest-bearing packages. These packages, called securities, are then sold to investors, who receive principal payments as well as monthly interest.

Since each security contains only a fraction of the underlying mortgage asset, securitizing the assets effectively lowers their risk profile. However, some investors may prefer assets with heightened risk profiles, as they typically boast higher yields. The riskier, higher-yielding mortgage-backed securities are known as “private label” and are usually issued by investment banks. Lower-yielding MBS are typically issued by a federal agency like Ginnie Mae, or a federal-sponsored enterprise such as Fannie Mae or Freddie Mac. This type of MBS meets certain underwriting criteria and is considered a more stable investment; in addition, it is guaranteed, which means that the investor is protected against credit losses in the event the borrower defaults.

What Are Some Examples of Mortgage-Backed Securities?

There are two types of mortgage-backed securities:

  1. Pass-throughs, which are set up like trusts, allow mortgage principal and interest payments to go directly to the investor.
  2. Collateralized mortgage obligations (CMOs), which are more complex debt instruments, contain many packages of securities segmented into fractional tranches, or slices. Each tranche has its own structure and yield, receives a distinct credit rating, and is sold separately. The main buyers of CMOs are institutional investors, such as investment banks, insurance companies, mutual funds, pension funds, and hedge funds, as well as governments and central banks.

What Role Do Banks Play in Mortgage-Backed Securities?

Financial institutions, like banks, actually play two roles in this process. First, they approve mortgages, which are long-term debt contracts that homebuyers must repay with interest. Second, they sell these mortgages to the U.S. government or another entity, who packages the assets into interest-bearing securities, which are similar to bonds.

Why do banks sell these mortgages? Because it allows them to remove the risky assets from their balance sheets, thus freeing them up to issue more loans, provide more funding, or conduct other business. In essence, the process of securitization enables banks to transfer their credit risk to investors.

How Are Mortgage-Backed Securities and Bonds Alike? How Are They Different?

Both mortgage-backed securities and bonds offer interest payments. Unlike bonds, which offer coupon payments twice a year, MBS provide these interest payments on a monthly basis, because homeowners make monthly mortgage payments. And since mortgage payments occur monthly, mortgage-backed securities don’t have a predetermined amount that will get redeemed by a scheduled maturity date, like bonds do. This is another difference. 

MBS Vs Bonds

Mortgage-Backed Securities (MBS)Fixed Coupon Bonds

Monthly Coupon

Semi-Annual Coupon

Interest and Principal

Interest Only

Payments Fluctuate

Fixed Maturity Date

Where Are Mortgage-Backed Securities Traded? How Can I Buy Them?

Mortgage-backed securities are traded on secondary markets, and the minimum investment can be as low as $10,000; however, investment banks typically purchase them in large lump sums, with $10 million not being uncommon. Talk to a broker if you are interested in buying or selling them.

How Were Mortgage-Backed Securities Responsible for the Financial Crisis?

Amazingly, the lowly U.S. homeowner was responsible for a series of events that caused trillions of dollars in investment losses around the world. Just what happened exactly?

In the early 2000s, at the peak of the housing market, predatory lending practices existed, targeting low-income individuals with a chance to afford a home of their own through a subprime mortgage. These mortgages featured adjustable rates that started out cheaply and then rose steeply. When the adjustable-rate mortgages shot up, homeowners were no longer able to repay their loans, and they defaulted as a result.

Low-quality mortgage-backed securities were filled with these subprime mortgages, and they collapsed as a result. This category of mortgages usually composed the riskiest tranche in a CMO, and when they imploded, they effectively rattled investors up the ranks of the entire securities market, causing a firesale selloff of “toxic debt.” Banks experienced a credit crunch, which meant they no longer had the funds to lend to one another, and many were left on the brink of insolvency. The crisis affected the entire U.S. stock market and financial markets around the world, and when Lehman Brothers, one of the largest investment banks in America, declared bankruptcy, the U.S. government had to step in with emergency capital to avoid a global financial meltdown.

The U.S. Congress approved $700 billion to add liquidity to the markets, and the U.S. Treasury injected billions more to stabilize the troubled banking industry in a measure called the Troubled Asset Relief Program, or TARP. Between 2008 and 2014, the Federal Reserve began a series of quantitative easing to increase the monetary supply and encourage lending. The U.S. automotive industry needed to be stabilized with additional government support, as did many homeowners, who struggled to avoid home foreclosure.

What Lessons Were Learned?

In 2010, the U.S. Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which sought to reform the financial industry and prevent another financial crisis. A special commission was set up to oversee financial firms and make sure their activities were stable; consumers were safeguarded against predatory lending practices, and banks were limited in the amount of speculative trading they could do. 

Additional oversight was extended to the Securities and Exchange Commission, and credit ratings agencies were tasked with providing more meaningful ratings. However, when Donald Trump took office in 2016, he rolled back many of the provisions in Dodd-Frank. Only time will tell if Wall Street has learned its lesson.

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International

Beloved mall retailer files Chapter 7 bankruptcy, will liquidate

The struggling chain has given up the fight and will close hundreds of stores around the world.

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It has been a brutal period for several popular retailers. The fallout from the covid pandemic and a challenging economic environment have pushed numerous chains into bankruptcy with Tuesday Morning, Christmas Tree Shops, and Bed Bath & Beyond all moving from Chapter 11 to Chapter 7 bankruptcy liquidation.

In all three of those cases, the companies faced clear financial pressures that led to inventory problems and vendors demanding faster, or even upfront payment. That creates a sort of inevitability.

Related: Beloved retailer finds life after bankruptcy, new famous owner

When a retailer faces financial pressure it sets off a cycle where vendors become wary of selling them items. That leads to barren shelves and no ability for the chain to sell its way out of its financial problems. 

Once that happens bankruptcy generally becomes the only option. Sometimes that means a Chapter 11 filing which gives the company a chance to negotiate with its creditors. In some cases, deals can be worked out where vendors extend longer terms or even forgive some debts, and banks offer an extension of loan terms.

In other cases, new funding can be secured which assuages vendor concerns or the company might be taken over by its vendors. Sometimes, as was the case with David's Bridal, a new owner steps in, adds new money, and makes deals with creditors in order to give the company a new lease on life.

It's rare that a retailer moves directly into Chapter 7 bankruptcy and decides to liquidate without trying to find a new source of funding.

Mall traffic has varied depending upon the type of mall.

Image source: Getty Images

The Body Shop has bad news for customers  

The Body Shop has been in a very public fight for survival. Fears began when the company closed half of its locations in the United Kingdom. That was followed by a bankruptcy-style filing in Canada and an abrupt closure of its U.S. stores on March 4.

"The Canadian subsidiary of the global beauty and cosmetics brand announced it has started restructuring proceedings by filing a Notice of Intention (NOI) to Make a Proposal pursuant to the Bankruptcy and Insolvency Act (Canada). In the same release, the company said that, as of March 1, 2024, The Body Shop US Limited has ceased operations," Chain Store Age reported.

A message on the company's U.S. website shared a simple message that does not appear to be the entire story.

"We're currently undergoing planned maintenance, but don't worry we're due to be back online soon."

That same message is still on the company's website, but a new filing makes it clear that the site is not down for maintenance, it's down for good.

The Body Shop files for Chapter 7 bankruptcy

While the future appeared bleak for The Body Shop, fans of the brand held out hope that a savior would step in. That's not going to be the case. 

The Body Shop filed for Chapter 7 bankruptcy in the United States.

"The US arm of the ethical cosmetics group has ceased trading at its 50 outlets. On Saturday (March 9), it filed for Chapter 7 insolvency, under which assets are sold off to clear debts, putting about 400 jobs at risk including those in a distribution center that still holds millions of dollars worth of stock," The Guardian reported.

After its closure in the United States, the survival of the brand remains very much in doubt. About half of the chain's stores in the United Kingdom remain open along with its Australian stores. 

The future of those stores remains very much in doubt and the chain has shared that it needs new funding in order for them to continue operating.

The Body Shop did not respond to a request for comment from TheStreet.   

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Government

Are Voters Recoiling Against Disorder?

Are Voters Recoiling Against Disorder?

Authored by Michael Barone via The Epoch Times (emphasis ours),

The headlines coming out of the Super…

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Are Voters Recoiling Against Disorder?

Authored by Michael Barone via The Epoch Times (emphasis ours),

The headlines coming out of the Super Tuesday primaries have got it right. Barring cataclysmic changes, Donald Trump and Joe Biden will be the Republican and Democratic nominees for president in 2024.

(Left) President Joe Biden delivers remarks on canceling student debt at Culver City Julian Dixon Library in Culver City, Calif., on Feb. 21, 2024. (Right) Republican presidential candidate and former U.S. President Donald Trump stands on stage during a campaign event at Big League Dreams Las Vegas in Las Vegas, Nev., on Jan. 27, 2024. (Mario Tama/Getty Images; David Becker/Getty Images)

With Nikki Haley’s withdrawal, there will be no more significantly contested primaries or caucuses—the earliest both parties’ races have been over since something like the current primary-dominated system was put in place in 1972.

The primary results have spotlighted some of both nominees’ weaknesses.

Donald Trump lost high-income, high-educated constituencies, including the entire metro area—aka the Swamp. Many but by no means all Haley votes there were cast by Biden Democrats. Mr. Trump can’t afford to lose too many of the others in target states like Pennsylvania and Michigan.

Majorities and large minorities of voters in overwhelmingly Latino counties in Texas’s Rio Grande Valley and some in Houston voted against Joe Biden, and even more against Senate nominee Rep. Colin Allred (D-Texas).

Returns from Hispanic precincts in New Hampshire and Massachusetts show the same thing. Mr. Biden can’t afford to lose too many Latino votes in target states like Arizona and Georgia.

When Mr. Trump rode down that escalator in 2015, commentators assumed he’d repel Latinos. Instead, Latino voters nationally, and especially the closest eyewitnesses of Biden’s open-border policy, have been trending heavily Republican.

High-income liberal Democrats may sport lawn signs proclaiming, “In this house, we believe ... no human is illegal.” The logical consequence of that belief is an open border. But modest-income folks in border counties know that flows of illegal immigrants result in disorder, disease, and crime.

There is plenty of impatience with increased disorder in election returns below the presidential level. Consider Los Angeles County, America’s largest county, with nearly 10 million people, more people than 40 of the 50 states. It voted 71 percent for Mr. Biden in 2020.

Current returns show county District Attorney George Gascon winning only 21 percent of the vote in the nonpartisan primary. He’ll apparently face Republican Nathan Hochman, a critic of his liberal policies, in November.

Gascon, elected after the May 2020 death of counterfeit-passing suspect George Floyd in Minneapolis, is one of many county prosecutors supported by billionaire George Soros. His policies include not charging juveniles as adults, not seeking higher penalties for gang membership or use of firearms, and bringing fewer misdemeanor cases.

The predictable result has been increased car thefts, burglaries, and personal robberies. Some 120 assistant district attorneys have left the office, and there’s a backlog of 10,000 unprosecuted cases.

More than a dozen other Soros-backed and similarly liberal prosecutors have faced strong opposition or have left office.

St. Louis prosecutor Kim Gardner resigned last May amid lawsuits seeking her removal, Milwaukee’s John Chisholm retired in January, and Baltimore’s Marilyn Mosby was defeated in July 2022 and convicted of perjury in September 2023. Last November, Loudoun County, Virginia, voters (62 percent Biden) ousted liberal Buta Biberaj, who declined to prosecute a transgender student for assault, and in June 2022 voters in San Francisco (85 percent Biden) recalled famed radical Chesa Boudin.

Similarly, this Tuesday, voters in San Francisco passed ballot measures strengthening police powers and requiring treatment of drug-addicted welfare recipients.

In retrospect, it appears the Floyd video, appearing after three months of COVID-19 confinement, sparked a frenzied, even crazed reaction, especially among the highly educated and articulate. One fatal incident was seen as proof that America’s “systemic racism” was worse than ever and that police forces should be defunded and perhaps abolished.

2020 was “the year America went crazy,” I wrote in January 2021, a year in which police funding was actually cut by Democrats in New York, Los Angeles, San Francisco, Seattle, and Denver. A year in which young New York Times (NYT) staffers claimed they were endangered by the publication of Sen. Tom Cotton’s (R-Ark.) opinion article advocating calling in military forces if necessary to stop rioting, as had been done in Detroit in 1967 and Los Angeles in 1992. A craven NYT publisher even fired the editorial page editor for running the article.

Evidence of visible and tangible discontent with increasing violence and its consequences—barren and locked shelves in Manhattan chain drugstores, skyrocketing carjackings in Washington, D.C.—is as unmistakable in polls and election results as it is in daily life in large metropolitan areas. Maybe 2024 will turn out to be the year even liberal America stopped acting crazy.

Chaos and disorder work against incumbents, as they did in 1968 when Democrats saw their party’s popular vote fall from 61 percent to 43 percent.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times or ZeroHedge.

Tyler Durden Sat, 03/09/2024 - 23:20

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Government

Veterans Affairs Kept COVID-19 Vaccine Mandate In Place Without Evidence

Veterans Affairs Kept COVID-19 Vaccine Mandate In Place Without Evidence

Authored by Zachary Stieber via The Epoch Times (emphasis ours),

The…

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Veterans Affairs Kept COVID-19 Vaccine Mandate In Place Without Evidence

Authored by Zachary Stieber via The Epoch Times (emphasis ours),

The U.S. Department of Veterans Affairs (VA) reviewed no data when deciding in 2023 to keep its COVID-19 vaccine mandate in place.

Doses of a COVID-19 vaccine in Washington in a file image. (Jacquelyn Martin/Pool/AFP via Getty Images)

VA Secretary Denis McDonough said on May 1, 2023, that the end of many other federal mandates “will not impact current policies at the Department of Veterans Affairs.”

He said the mandate was remaining for VA health care personnel “to ensure the safety of veterans and our colleagues.”

Mr. McDonough did not cite any studies or other data. A VA spokesperson declined to provide any data that was reviewed when deciding not to rescind the mandate. The Epoch Times submitted a Freedom of Information Act for “all documents outlining which data was relied upon when establishing the mandate when deciding to keep the mandate in place.”

The agency searched for such data and did not find any.

The VA does not even attempt to justify its policies with science, because it can’t,” Leslie Manookian, president and founder of the Health Freedom Defense Fund, told The Epoch Times.

“The VA just trusts that the process and cost of challenging its unfounded policies is so onerous, most people are dissuaded from even trying,” she added.

The VA’s mandate remains in place to this day.

The VA’s website claims that vaccines “help protect you from getting severe illness” and “offer good protection against most COVID-19 variants,” pointing in part to observational data from the U.S. Centers for Disease Control and Prevention (CDC) that estimate the vaccines provide poor protection against symptomatic infection and transient shielding against hospitalization.

There have also been increasing concerns among outside scientists about confirmed side effects like heart inflammation—the VA hid a safety signal it detected for the inflammation—and possible side effects such as tinnitus, which shift the benefit-risk calculus.

President Joe Biden imposed a slate of COVID-19 vaccine mandates in 2021. The VA was the first federal agency to implement a mandate.

President Biden rescinded the mandates in May 2023, citing a drop in COVID-19 cases and hospitalizations. His administration maintains the choice to require vaccines was the right one and saved lives.

“Our administration’s vaccination requirements helped ensure the safety of workers in critical workforces including those in the healthcare and education sectors, protecting themselves and the populations they serve, and strengthening their ability to provide services without disruptions to operations,” the White House said.

Some experts said requiring vaccination meant many younger people were forced to get a vaccine despite the risks potentially outweighing the benefits, leaving fewer doses for older adults.

By mandating the vaccines to younger people and those with natural immunity from having had COVID, older people in the U.S. and other countries did not have access to them, and many people might have died because of that,” Martin Kulldorff, a professor of medicine on leave from Harvard Medical School, told The Epoch Times previously.

The VA was one of just a handful of agencies to keep its mandate in place following the removal of many federal mandates.

“At this time, the vaccine requirement will remain in effect for VA health care personnel, including VA psychologists, pharmacists, social workers, nursing assistants, physical therapists, respiratory therapists, peer specialists, medical support assistants, engineers, housekeepers, and other clinical, administrative, and infrastructure support employees,” Mr. McDonough wrote to VA employees at the time.

This also includes VA volunteers and contractors. Effectively, this means that any Veterans Health Administration (VHA) employee, volunteer, or contractor who works in VHA facilities, visits VHA facilities, or provides direct care to those we serve will still be subject to the vaccine requirement at this time,” he said. “We continue to monitor and discuss this requirement, and we will provide more information about the vaccination requirements for VA health care employees soon. As always, we will process requests for vaccination exceptions in accordance with applicable laws, regulations, and policies.”

The version of the shots cleared in the fall of 2022, and available through the fall of 2023, did not have any clinical trial data supporting them.

A new version was approved in the fall of 2023 because there were indications that the shots not only offered temporary protection but also that the level of protection was lower than what was observed during earlier stages of the pandemic.

Ms. Manookian, whose group has challenged several of the federal mandates, said that the mandate “illustrates the dangers of the administrative state and how these federal agencies have become a law unto themselves.”

Tyler Durden Sat, 03/09/2024 - 22:10

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