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Comments (15)

Dec 10, 2011 - 11:47pm

Yes they are. Think about it ...a derivative is an instrument whose value depends on another underlying asset and in this case that asset is a pool of either CRE loans or residential loans.

Hope this explains.

Wally!
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Best Response
Dec 18, 2011 - 4:16pm
mb666:
Amphipathic:
A MBS are not derivative, it's a pool of asset (mortgages) that has been securitized.

Not sure if you're joking...

But yes MBS are backed by other assets (mortgages) and therefore are derivatives.

No, I am not joking. An MBS is a type of ABS, and therefore a security, not a derivative. The definition for securitization makes it sound like a derivative, but it's not. You actually own the debt, it's not a forward commitment or contingent claim.

Dec 18, 2011 - 2:54pm

Plain vanilla MBS= No. Why, you may ask. Since it is bundled into a bond and the holders receive payments.

When splitting up a MBS into tranches and selling them off= CMO, then it becomes a derivative.

CNBC sucks

"This financial crisis is worse than a divorce. I've lost all my money, but the wife is still here." - Client after getting blown up

  • 1
Dec 18, 2011 - 4:21pm
Working9-5:
Plain vanilla MBS= No. Why, you may ask. Since it is bundled into a bond and the holders receive payments.

When splitting up a MBS into tranches and selling them off= CMO, then it becomes a derivative.

Hmm, I still think that a CMO is a debt instrument, not a derivative. It is just a different way of bundling the debt.

Dec 18, 2011 - 5:18pm

Ok, set things straight.

MBS not derivative.

Technically, all CMOs are derivatives although you will not hear a CMO trader say they are a "derivatives trader". Occasionally you will hear CMO trader say that he trades "CMO derivatives" and that means that he traders IO, PO, and IOS (not fixed/floating CMOs) --but he is most likely when asked to say "I trade structured IOs for blank" or "I trade the trust IO book for..."

This is the same for the rest of the mortgage products even if they are derivatives (ie the CMBX trader would not say he is a derivatives trader, he would say that he is a CMBX trader. Same for the ABX trader)

"Greed, in all of its forms; greed for life, for money, for love, for knowledge has marked the upward surge of mankind. And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA."
  • 2
Dec 18, 2011 - 6:27pm

Found this on the web: http://www.clevelandfed.org/research/Commentary/1995/0901.pdf ... says that CMOs are indeed financial derivatives.

With regards to MBS I was wrong. They don't seem to be derivatives. This can be an issue of semantics as I see asset-backed securities and the term derivatives combined all across the web... like here: http://derivativedribble.wordpress.com/2009/02/02/credit-default-swaps-….

Dec 18, 2011 - 7:17pm

That's because there were lots of CDS contracts written on MBS securities. The CDS is the derivative, the original MBS is not.

"Greed, in all of its forms; greed for life, for money, for love, for knowledge has marked the upward surge of mankind. And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA."
  • 1
Dec 19, 2011 - 1:11pm

Correct. Once you carve up the cash flows it becomes a derivative.

Jack: They’re all former investment bankers who were laid off from that economic crisis that Nancy Pelosi caused. They have zero real world skills, but God they work hard.
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