If you told me three years ago, when our economy was in shambles, that we would be doing the exact same thing a few years later, I might have had you committed. Well, here we are, believe it or not, MBS’s are back! (See, Prices on Mortgage Backed Securities Prove Irresistable)
In 2009 our economy was crumbling, and the Dow Jones was establishing new lows daily. A major cause for the meltdown was a result of the wide spread failing of complex securities that were backed by real estate mortgages. These securities are known as MBS’s (mortgage backed securities-not too creative). In 2009 the failure of the MBS market was arguably the primary cause of the recession.
Despite heavy regulations that were implemented to prevent the reckless trading of these securities, the fact that they are being traded at high volumes again should be reason for concern (or wide spread panic). Let me explain why.
There are a few reasons why the MBS market failed in 2009. One reason was the properties within the securities were overvalued, either because of negligent appraisals or the property depreciated to the point where it became difficult to sell (check out another of my blogs, The Worthless Million Dollar Property). Another reason was that these securities contained a disproportionate ratio of subprime mortgages, creating a higher risk they would default. Thanks to new regulation in this area, these reasons are less likely to play out again.
There is however, another lesser known reason why these securities failed and this reason can still reoccur. The complexity of these securities made them difficult for the traders to accurately predict their profit margins, and the more complex the security is, the likelier that the traders will go closer to the edge and bet big on high volume, low profit margin securities. In other words, they will think their super complicated model is fail proof, and take lower profit margins.
These securities are being sold again, and we have no assurances that the same bets that ruined our economy in ‘09 won’t happen again. With little regulation in place to stop brazen investors from causing another meltdown I have nothing more to say other than-
Woe unto us.