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Mortgage-backed securities I | Finance & Capital Markets | Khan Academy

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Part I of the introduction to mortgage-backed securities. Created by Sal Khan. Watch the next lesson: https://www.khanacademy.org/economics-finance-domain/core-finance/derivative-securities/mort-backed-secs-tut/v/mortgage-backed-securities-ii?utm_source=YT&utm_medium=Desc&utm_campaign=financeandcapitalmarkets Missed the previous lesson? Watch here: https://www.khanacademy.org/economics-finance-domain/core-finance/derivative-securities/mort-backed-secs-tut/v/mortgage-back-security-overview?utm_source=YT&utm_medium=Desc&utm_campaign=financeandcapitalmarkets Finance and capital markets on Khan Academy: In many commodities markets, it is very helpful for buyers or sellers to lock-in future prices. This is what both forwards and futures allow for. This tutorial explains how they work and what the difference is between the two. About Khan Academy: Khan Academy offers practice exercises, instructional videos, and a personalized learning dashboard that empower learners to study at their own pace in and outside of the classroom. We tackle math, science, computer programming, history, art history, economics, and more. Our math missions guide learners from kindergarten to calculus using state-of-the-art, adaptive technology that identifies strengths and learning gaps. We've also partnered with institutions like NASA, The Museum of Modern Art, The California Academy of Sciences, and MIT to offer specialized content. For free. For everyone. Forever. #YouCanLearnAnything Subscribe to Khan Academy’s Finance and Capital Markets channel: https://www.youtube.com/channel/UCQ1Rt02HirUvBK2D2-ZO_2g?sub_confirmation=1 Subscribe to Khan Academy: https://www.youtube.com/subscription_center?add_user=khanacademy
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Text Comments (165)
Wally Al Mutairi (28 days ago)
oh 2007, Hello Middle School !
Abonanno24601 (1 month ago)
Hello 2007
Donato Colangelo (1 month ago)
Guys I thought this was a recent video. It's been done 10 yrs ago 😂😂😂 Great video, by the way!
omoolufemi taiwo (3 months ago)
Lovely video, I now understand, have ben struggling with my studies in finance lecturers teaching s so boring. that's why I got on youtube. weldone khan academy
Alex Carrozzi (3 months ago)
Oh my god. Your timing on this video is uncanny....
¡ Expl0 (4 months ago)
There are not spanish subtitles, okay, this is my moment to learn english xD
Deep Sarkar (5 months ago)
Apart from the reason given in the video for the commercial bank to sell the (loan portfolio) if i may say so, to the Investment bank, could it also be that they perhaps wanted to safeguard against any sort of credit risk, such as in case the customers failed to pay the EMIs and defaulted?
RICHARD (5 months ago)
Who's here because of the movie The Big Short?
이명후 (6 months ago)
Investor lose the industry then... What is left? When government budget is lower with net export is turn to the import then.... Bye PPP OF ECONOMIC
이명후 (6 months ago)
Gross domestic production. Avg of population per avg of production in land of domestic
이명후 (6 months ago)
이명후 (6 months ago)
Reducing population or cut down interesting rate or deflation control
이명후 (6 months ago)
Unavailable unvaluable
이명후 (6 months ago)
Think about it ... Consumer market share plus investor and plus government plus extra net export ... If negative of net export with consumer had lose the money in keep low... Then MBS and ABS goes bubble
이명후 (6 months ago)
Stefan van Rooyen (7 months ago)
CFA level 1 in Desember 2018?
Sagar Negi (8 months ago)
It was a very good insightful video
bodom11716 (9 months ago)
omg 2007
Bender Bending Rodriguez (9 months ago)
Is this like the volatility on the 2011 movie Margin Call ?
Sean Rojas (3 months ago)
Bender Bending Rodriguez yes. Although there’s was more general securities than movies like The Big Short.
Chris Bishop (11 months ago)
wait do you mean that you have to pay the one million on interest alone and then at year 10 you pay the initial principal as well?
Chris Bishop (11 months ago)
insane beyond reason lmfao
Taylor Knight (11 months ago)
you're paying the bank 1 million for the ability to wait 10 years before you have to pay back. You borrow 1 million for 10 years on 10 percent interest per year.
dugyfresh92 (11 months ago)
This 10 year old video and part II helped me nail my job interview this morning. I got the offer! Thanks Khan Academy!
estebiitan5 (28 days ago)
Hey, may I know for what position was it? I have one interview coming up and maybe you could shed more life at the hiring process. Thanks.
Vineeth11797 (1 year ago)
The major reason the bank sells the loan to the investment bank is so that what was receivables before for the bank is now liquid cash. So now, they can lend even more with the cash they receive. (basically liquidation of illiquid assets)...Not just for the fees!
Dave McCrae (1 year ago)
And this is how lawyers make money. http://weputthelimeinthecoconut.weebly.com/sasco-2007-mln1.html
Yves-Yann Amany (1 year ago)
Great Account.. Better than attending classe
Adele D (2 years ago)
lol, just before crisis
Ryan Lee (2 years ago)
sounds more like a balloon land contract than a loan lol.
Michael Abrham (2 years ago)
you explain it way better than my teachers.thank you
TheTromboneGeek (2 years ago)
He knew... He KNEW it was coming...
Lian Light (2 years ago)
thanks very much for this.
Rob Hart (2 years ago)
Hi Sal. What happens if someone defaults on the loan? Does the house go to the bank? Or to the Investment bank?
Ethan Rubin (1 year ago)
The home goes to the servicer of the mortgage, incorrect to state that its the bank automatically. He doesn't go into this stuff b/c getting into the weeds of these fixed income securities are crazy. I work with these
FlashOfFireflies (2 years ago)
Bank - either through power of sale or foreclosure
Matthew Warrenfells (2 years ago)
Why are you the way that you are.
ROK (2 years ago)
I don't get why the first bank that let 1000 people borrow a million each (total of $1 Billion they lent out) would want to sell all of those mortgages for $1 billion. How did they make their money?
Ethan Rubin (1 year ago)
they make money off closing fees up front, then they took the risk off their books, got the money up front and continued the cycle of lending money while shifting risk off their balance sheet to the balance sheet of investors
akm am (2 years ago)
They feared that they would loose money if they did not sell
Agnostic Agnostic (3 years ago)
Just started watching The Big Short from PB. Quality is watchable. This subject of Mortgage-Back Securities immediately came up (or Private labelled MBS as they also call it in the movie). I knew I had to watch these from Khan to understand it. Wolf of Wall street was enjoyable to watch but it would have been better if I understood what was going on financially. Not making the same mistake with this movie!
Joseph Chang (3 years ago)
Im not sure if i'm right, but if you got confused about the first part about paying the bank a total of 2 million after 10 years ( 100k x 9 + 1.1m). Don't forget that the bank gave you 1 million to begin with. The bank will earn 1 million dollars and you will be paying a total of 1 million at the end. Here's an example, the toy gun on the shelf at the toy store is worth 10 cookies. I have no cookies, so my friend (the bank) tells me that he can lend me 10 cookies, but for 9 days i have to pay him back an interest of 1 cookie and on the 10th i have to pay back an interest of 1 cookie plus the original 10 cookies that he lends you. You may think this sounds unfair because I have to give a total of 20 cookies at the end. But dont forget your friend lent you 10 cookies to begin with plus 10 extra days to gather 10 more cookies. At the end you are paying the full amount but the bank allows you to pay for it over a period of time.
Lanoroth (1 day ago)
+Chris Bishop We humans don't live forever, therefor there's a certain benefit to having something sooner rather than later (especially when we're talking about non perishable items, you can enjoy them for longer). Also, you can borrow money and then use that money to make even more money (as long as your ROI > interest on the debt)
Chris Bishop (11 months ago)
Then who in there right mind under this sun would do that?
MagnumDB (3 years ago)
I think I need to watch this series before watching 'The Big Short' because so far, it looks like I won't understand ANYTHING in that film.
Sha ne (4 months ago)
Good movie.
Emilio Costaguta (5 months ago)
I´m here for the exact same reason
U Wot??! (2 years ago)
HAHA oh my gosh I'm literally doing this right now.
Md Shahajada Imran (2 years ago)
OK. I will watch that movie soon.
Casperian (3 years ago)
You're quiet the fine artist ;-)
51MontyPython (3 years ago)
To those wondering why bank 1 would sell the 1B$ in loans for that same amount, as opposed to more in order to cover the 1B$ debts obligations plus interest it has coming to it, much less without getting a "profit" on top of that, understand that in the real world, bank 1 never actually had a billion dollars to loan.  Because of 1/10 fractional reserve requirements, it only really needed 1/10 of 1B$ in order to make the 1B$ in loans, which is an extra 9/10ths of 1B$ it would then have magically added to it's deposits right out of thin air.  But these are not "profits," because it isn't the bank's money, but rather, the depositors' until they finally pay them back.  Upon that time, the bank will have made 9/10ths of 1B$ on that initial 1/10ths of 1B$, which doesn't even include interest (can we say, CHAH-CHING!).  But that takes time, and the bank needs more money to loan right _now,_ in order to continue making even more money in the meantime, so what appears to be taking a loss in the short run really isn't.  To the contrary, it has made _gains,_ and no, not as much as would have been otherwise (because they lose the interest they otherwise would have received), but they still made massive profits in right _now,_ in one fail swoop (in very short order to say the least), whereas bank 2 has all that money coming to it over time, who is able to do so because it already has plenty of cash on hand to do it's own business, and isn't in any need of replacement deposits at present.  If bank 1 had to charge _MORE_ than 1B$ in order to sell the loans, then it would make less sense for bank 2 to buy them when it can just make out it's own 1B$ n loans on it's own.  But of course, investment banks aren't really in the mortgage business.  But presented with an opportunity to buy up an entire package, might do so.  Granted, if they knew now what they knew then about just how sub-prime these mortgages really were, would probably not have done so.  (Of course, when the govt is requiring people to make them, as was the case in the debacle that came to a head in 2008, it's kinda inevitable.)  Cheers, all.
conradvfr750 (3 years ago)
Because this explanation does not seem to understand how Banks create money when they make a loan, I have no confidence that anything else relating to how MBS affect a Banks and Investment Banks balance sheets. How do MBS really work? What about how SPVs and SPEs (Special Purpose Vehicles & Special Purpose Entities)?
conradvfr750 (3 years ago)
Banks do not lend other peoples money, they create the money at the point the loan is issued and it is simultaneously added as an Asset (The Loan) and a Liability (The Bank Deposit Cash created out of thin air), this then balances the Banks Balance Sheet. They don't need money to lend money - Banks create 97% of our money when they make loans. That's why we had a credit crunch - more accurately should have been called a Money crunch.
Stars Are Angels (2 years ago)
+conradvfr750 So let me understand this. Why would the banks lend money to prospective home owners when 1) they lose money by selling the loans to investment banks for less than the original value due to guarantee fees and 2) they lose even more by paying mortgage brokers a finder's fee. Sure they would have hard cash to invest with given to them by the investment banks for the loans but it seems like a crappy deal altogether, no?
Sam Dawkins (4 years ago)
Everybody is quick to bitch about the banks in all this mess, but the common man needs to man up. people shouldn't have taken on loans they couldn't afford. of we had all been just a bit more responsible none of this would have happened
Chris Bishop (11 months ago)
I feel like everyone blames the banks and although they carry a portion of the burden most people don't understand that banks couldn't do what there doing with government aid and chroney capitalism
Chris Bishop (11 months ago)
well if you increase wages then the cost of living rises as well haha
Chris Bishop (11 months ago)
exactly. I'd never take out a loan, and I don't want to be punished for the people that decided to and it didn't work out
Sam Dawkins (1 year ago)
if a mafia boss says to you "let me loan you 10K, dont worry bout it, its all good" would you take it? no, cos yr not an idiot. you dont take loans you cant pay and you dont take loans that are trouble. taking out a dumb loan is the sign of an idiot. people who do that deserve to be homeless on the streets. too many betas out that are too weak to be winners at life so they cry bout it
Chris Coleman (4 years ago)
there should be lesson on how fire is started next to this.... the change of change, when change on change can't keep up, there is fire....delta..gamma.....30 mortages reek of usury.....
Sam Murphy (4 years ago)
High street banks don't lend money that other people have saved! They simply create most of it out of thin air!!   (the banker jargon for this is 'fractional reserve banking')
Denzel Matsaudza (5 years ago)
Needs to be more to the point and about Mortgage Backed Securities rather than traditional loans! Hardly have any time to go through a collection of videos. 
Ro SJ (1 year ago)
Then Dont watch or comment. Shoo away .. Shoooo
Daski69 (5 years ago)
The only way this could ever make sense to me would be if Bank1 sold the loans for more than 1B$ to Bank2, in which case Bank1 makes some money fast and Bank2 over time makes a little less than 100m$. Is this the case? I mean Bank1 lends out 1B and takes 10% interest (100m) Bank2 buys the loans for 1B + 50m Bank1 makes 50$ right away Bank2 earns its' 50$ over time from the debtor Help, please!
Tim Broders (5 years ago)
Many thanks for explaining the 2007-8 financial crisis
SAK 1991 (5 years ago)
Aquisitions by default are more common in US, a rare thing in Europe.
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Azeem Ben Ysreal (5 years ago)
Thank you
Scott Alter (5 years ago)
This was a terrible presentation of MBS. What a bore!!!!
jykBU11 (5 years ago)
Kiki S (5 years ago)
Why not write something constructive you douchebag?
lysol5555 (5 years ago)
i can take a video of my shit and it would still be a better video than this
lysol5555 (5 years ago)
kenny (5 years ago)
there seems to be agenda here? i dont think all the informatiom is respreprented correctly
Jay (5 years ago)
It's not .1 mil, 100k per year times 10 it's 1 M, 10% interest per yr, 2M for the loan interests+principal.
Maurice Haye (9 months ago)
Jay I was confused wen he said .1
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0007Kiri (6 years ago)
Dave Smiff (6 years ago)
cool video. i love the way you simplify it. one question tho, why is it important that the loans are bundled up for sale to the investment bank?
Silversong88 (6 years ago)
Khan covers this in the previous two videos. It would be best if you were to watch it through his site as opposed to youtube. The site leads you through the videos nicely
UmTheMuse (6 years ago)
Khan Academy glossed over the fact that banks charge you fees for filling out paper work (they have to look at how good you are at paying back loans, how good the property is if you don't pay the loan back, etc). I don't know how it works for residential properties, but for commercial properties, the fees are often tacked on to the loan.
LoopInc (6 years ago)
just got an internship at mortgage banking
GSquire180 (6 years ago)
Can you explain how the fees work? Like does bank # 1 sell the $1B loan bundle for more than $1B? Just making sure I understand this correctly. I understand the concept that bank #1 would not have sold the loans without making money on it, but I am just not clear on HOW they make this money.
TheFlamebarrier (6 years ago)
@TheFlamebarrier 16:15
TheFlamebarrier (6 years ago)
"...and says hey, investment bank, why don't you give me a billion dollars....."....PRICELESS....
Abdul Qadir (6 years ago)
@djguy100 watch the video carefully, the extra 0.1million is 10% interest
djguy100 (6 years ago)
Your maths is wrong. If you pay $100,000 for 10 years it equates to $1 million, not $1.1 million as you said at 3:08. That would be $10,000 per year repayments, not $100,000
Aruta Inc. (6 months ago)
In the 10th year you repay the initial total loan amount ($1 million) plus the 10% interest ($100k). So in year 10 alone, you pay out $1.1 million to the bank.
Jesa Espineli (7 years ago)
thank you for this video. this is really a great help for my research
parthvatsal1 (7 years ago)
That's me!! I still exist!!
Jerome Pratt (7 years ago)
Of course I'm extremely wealthy, haven't you seen my hat?
bobby mathew (7 years ago)
Eliminate mortgage backed securities. Without your knowledge your money has been taken over and sold. Using a home to gamble is a wrong idea
CivilSerpent Tt (7 years ago)
you lost me at the end
jcs7 (7 years ago)
kn53535 (7 years ago)
@ThyHolyHandgrenade i think all loans require a prinicipal repayment but i think what sal is supposing in this example is that the borrower is only paying the interest during the course of the ten years and the prinicipal repayment at the end (just to make the maths a bit easier)
giac01 (7 years ago)
3:33 "And you have a hat" aha did anyone else think this was really random?
Enter.a.name.here (7 years ago)
@cmbrk common, give me a better explanation. I dare you to try.
TohaBgood2 (7 years ago)
@dandreoli1973 He's oversimplifying for the less financial-market-savvy students. There's a video where he talks about this in slightly greater detail. See "Housing Price Conundrum (part 3)"
TohaBgood2 (7 years ago)
@ThyHolyHandgrenade What he means is that you don't have to pay off a part of the loan principal alongside your interest payment every month. You just pay it in bulk at the end. Normally you pay the 10% interest plus some percentage of your loan. In which case at the end of your term, you don't have any principal to pay.
TohaBgood2 (7 years ago)
Khan sounds genuinely excited to talk about financial markets :D You can feel the latent hedge fund analyst in his voice :DD
Pareto8020 (7 years ago)
@cmbrk for a good reason...
Cem Berk (7 years ago)
CooKing Food (6 months ago)
would love you to help us out a bit to understand it more in depth :)
Gastogh (7 years ago)
@ZzzVvvYyy: It might not be the best of comedy, but I lol'd all the same. Thanks for that. xD
dandreoli1973 (7 years ago)
Mortgage Backed Securities are not sold by investment banks. They are sold by the government sponsored enterprises (GSEs), Fannie Mae, Freddie Mac, and Ginnie Mae. GSEs purchase mortgages from lending banks. Investment banks also purchase mortgages, and (indirectly) sell securities backed by them (through SPVs), but these are called collateralized debt obligations (CDOs). The SPVs either buy the mortgages or sell mortgage default insurance (CDS). Either way, investors purchase CDOs from SPVs.
dandreoli1973 (7 years ago)
Mortgage Backed Securities are not sold by investment banks. They are sold by the government sponsored enterprises (GSEs), Fannie Mae, Freddie Mac, and Ginnie Mae. GSEs purchase mortgages from lending banks. Investment banks also purchase mortgages, and (indirectly) sell securities backed by them (through SPVs), but these are called collateralized debt obligations (CDOs). The SPVs either buy the mortgages or sell mortgage default insurance (CDS). Either way, investors purchase CDOs from SPVs.
You Don't Say? (7 years ago)
@pauli3100 i noticed that too. would be good to get some video notes up there to indicate this mistake
pauli3100 (7 years ago)
Hey just a quick question. On the first half of your presentation when you finshed paying the Ballon Pymt loan of 1M dollars your total was 1.1M after 10 years of intrest. Isn't it 2M after ten yrs of intrest plus the principal. Thanks.
T.C. Ferguson (8 years ago)
What did you use for your screen capture? which software? thanks!
auctionmusic (8 years ago)
Bank mortgages should be outlawed...illegal. A mortgage should be setup such that the monthly interest is 1/2 the payment, and the other half is the principle. If you can't afford it, then no loan....no house...no soaring house prices...people can now afford homes, and they can pay them off much sooner...The current structure of banking causes prices to soar, and you wind up trapped in a 30 year debt...the current structure is a complete and total ripoff..its criminal!....
ArizonaMortgageMan (8 years ago)
That's a nice job of explaining MBS. I also like the way you made the presentation.
Felipe Ossa (8 years ago)
I like teenage-backed securities more than mortgage backed ones. Check out "Genius Trust."
Jon Sm (8 years ago)
@yowmer WTH?! so with most of these housing loans the total sum you end up paying is like what....TWICE the principal? (100k X 10 + 1M = 2M?)
Jon Sm (8 years ago)
anyone know why we cant just pay the developer of the property directly (in installments)? why go to the middleman (the bank), obtain a loan, pay the developer, then pay the bank the interest?
Mahmoud Azouz (8 years ago)
I think why the mortgagor bank doesn't do the whole process rather than pass it to the investment bank is because it wants to make the mortgage under a separate entity that has its own credit rating, so the rating will be higher than the mortgagor rating itself. Am I right? thanks
maskware (8 years ago)
there is a mistake in your presentation, $1M at 10% means you have to pay $1.1k. If you make a credit on 10 years it means each year you have to pay 110.000$
Gabriella Cerezo (8 years ago)
Jon Sm (8 years ago)
@speculatorMan yea thats what i thought too...can someone clarify?
chubbychilli (9 years ago)
A milllion from ur uncle!!! I WISH! :)
Dean Wegner (9 years ago)
Lunatic4ever (9 years ago)
really loved this one,great thing bro
Lukeeeeo (9 years ago)
and you..you..you have a hat.
MrMortgage1 (9 years ago)
A good mortgage is like a work of art. mortgageartist. com Your path to the best mortgage information resource around. Educating yourself costs you nothing, ignorance can cost you everything.
MrMortgage1 (9 years ago)
this is crap

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