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Chapter 334 Subprime loans are a bit hot?
After the Spring Festival last year, Gao Yang used the rent income of his mother-in-law Wu Lan to remit 100 million US dollars to Wu Fei and Chen Lan, and began to build positions in these four US stocks.

After the Spring Festival this year, because the investment income from Su Ning's stock was good, Gao Yang simply discussed with Wu Lan to use part of her rent income this year, plus part of Gu Yawen's income from Yuanda Company and Yueju Company last year, and borrow money In the name of Wu Fei, he remitted 200 million U.S. dollars to Wu Fei to increase his position in U.S. stocks.

Originally planned to remit 100 million US dollars per year, Gao Yang decided to remit 200 million US dollars this year, and then no more.

Because at the end of last year, Wu Lan borrowed 1.65 million soft sister coins with real estate mortgages, which was used by Gao Yang to hold the Android company.

After discussing about increasing the stock position, Gao Yang asked again: "Sister-in-law, are you still working now?"

Chen Lan said: "I'm going to take a rest when I return to the United States this time. For more than a year, we have bought the stocks you suggested with our own funds and made more than 100 million US dollars. The income is quite high."

Gu Yawen said: "Sister-in-law, you should also go to bed early. Having a baby is the most important thing. On the Android company side, it is enough to have a big brother watching over it. If there is something important about Andy Rubin, you can just communicate with him on the phone."

"Yes, it's time to rest." Chen Lan nodded, "This villa is pretty good. How much did you pay for it?"

Gu Yawen said: "This villa was bought by Ruohan's family for her. The original price was 1000 million yuan, with a discount of 96%. It has a total ground area of ​​560 square meters and an independent garden of 200 square meters. Calculated, the unit price is close to 1.8 yuan. The price in Beijing is quite high."

Chen Lan said: "This house, if it is in a similar location in New York, is worth about 100 million US dollars. There are too many people in China. In a super-large city like Beijing, villas are very scarce."

Gao Yang said: "What is the current real estate market in the United States, and what is the trend of housing prices?"

Wu Fei said: "House prices in the United States have been rising at a level slightly higher than inflation for decades, and there is also a certain cycle.

Huaxia is called a villa, which is considered a mid-range house in the United States, a small villa with two or three floors and a lawn.

In the real estate market across the United States last year, the average sales price was $30.Of course, the price difference is still quite large by region and city.

Since around 2003, there has been a new rising cycle of housing prices in the United States, and it has accelerated significantly. This also involves a new type of mortgage financial instrument called CDO, which is a tool for asset securitization. The meaning of coming over is a secured debt certificate.

CDO is very popular on Wall Street, which involves the theory of financial risk management, from a famous paper published in the "Fixed Income" magazine in 2000.

The insight of this paper is very unique. It constructs a risk measurement model. Realizing the application value of this paper, Wall Street investment banks created CDO products with the cash flow of housing mortgage loans as the underlying assets, which stimulated the development of housing mortgages. Loan development. "

Wu Fei suddenly talked about the CDO, which reminded Gao Yang of the movie "The Big Short", so he asked, "Brother, what is the specific function of this CDO, can you tell me about it?"

Wu Fei thought about it: "This involves some professional knowledge in finance, let me try to make an analogy.

In China, there are also mortgage loans to buy houses, and the term is generally around 20 years, right? "

Gao Yang said: "Yes, generally the repayment period will not exceed 25 years."

Wu Fei said: "Before, it was the same in the United States. The mortgage cycle is usually 20 to 30 years, so the middle class in the United States generally has mortgage loans, and the interest is very cheap. Housing prices have been rising slightly and steadily. There are cycles, but the fluctuations are not large. .

Before the United States, there was a mortgage securitization tool MBS, that is, housing mortgage-backed securities.

MBS is mortgaged by the mortgage, which can also be understood as the real mortgage of the house. If the buyer defaults on the mortgage, the bank will take the house away.

For example, if you are a home buyer with a mortgage, and your mortgage is packaged into MBS, then the loan interest you pay each month will be given to the investor who holds the MBS, not the bank, because the bank will take your mortgage Sold.

The cleverness of Wall Street investment banks is that they designed CDOs based on a paper on financial asset risk management to package the cash flow of housing mortgage interest payments and securitize it.

The house is no longer the collateral of the CDO. The expected cash flow of the mortgage loan repaid by the home buyer is the underlying asset packaged by the CDO.

Both sides of the CDO transaction may be far away from the real estate market. This is an innovation in financial derivatives transactions. The emergence of CDO has formed support for MBS.

In the U.S. real estate financial market, there are a variety of housing loans, borrowers have different qualifications, and the types of mortgage loans, interest and other costs and risks are also very different.

Wall Street has designed products like CDO to package these different borrowers and different expected cash flows of housing loans, which involve different risk levels and returns, use the CDO model, package them up, carry out risk pricing, and sell them to investors.

Originally, with the support of MBS, the bank could quickly withdraw the mortgage funds and sell the next round of mortgages without waiting for 30 to [-] years.With the support of CDO, the market size of MBS has also been further expanded.

Moreover, when selling CDO products, the bank can also draw a commission of about 2%.

Then, with derivative innovative tools such as CDO, more institutions and investors have entered the market, the pool of funds around real estate mortgage loans has become larger, the capital market has become richer, and it is easier for home buyers to obtain mortgage loans Buy a house, all parties are satisfied.

As a result, the scale of mortgage loans has expanded rapidly, the real estate market has also heated up, and the rise in housing prices has stimulated more people to buy houses with mortgages, and more investors to invest in MBS and CDO, just like a snowball, more and more The funds entered the multi-level real estate mortgage loan market.

Therefore, such an innovative financial design as CDO is very powerful, and has been welcomed by all parties in the market, which has promoted the prosperity of the real estate market. "

Gao Yang smiled and said, "Brother, I don't know much about such complicated financial instruments. I invest in A-shares, so I'll take the stock market as an example.

The stock market is also divided into bull and bear rotations. When more funds enter the market, the popularity is strong, and the stock price continues to be pushed up, ushering in a bull market.

As soon as the bull market appears, the wealth effect of making money from stock trading comes out, and then more people enter the market with more money to make money, until the risk rises, the smart people withdraw first, and when the bull market collapses later, many people will be trapped on the top of the mountain again .

Therefore, in A shares, after each round of bull market, only a very small number of people can actually make money.

Brother, the CDO financial tool you just mentioned has stimulated the real estate market in the United States and the rise in housing prices. If there is too much money pouring in in the future, will it be like the bull market in the stock market? It will be lively until the end, and there will be a sudden collapse danger? "

Chen Lan said with a smile: "Gao Yang, if the CDO collapses, unless the US real estate market crashes, which is almost impossible and the probability is very small.

The United States has the most developed financial market in the world, the largest collection of funds, and the most developed multi-level capital market. There are quite a lot of financial derivative transactions, and the scale is also very large.

CDO is not an independent loan asset securitization product, there is also CDS behind it.

CDS means credit default swap, which can also be called credit default swap, or loan default insurance. It is the most widely traded over-the-counter credit derivative in the world. You can understand it as an insurance product.

It is a tradable insurance policy with a variable price, which guarantees the loan risk.

Therefore, many CDO investors are actually institutional investors. After buying CDOs, they can then buy CDS to hedge and control their risk exposure.

Your elder brother just mentioned the design principle of CDO, which is somewhat similar to credit rating bonds. The credit rating of bonds ranges from B, 2B, 3B...and so on, up to the highest level of 3A.

For example, in a CDO asset consolidation package, there are [-] mortgages, most of which are AA-grade or even AAA-grade mortgages, and a small number of B-grade mortgages with high default risk.

If there are really a small number of B-grade mortgages that default, then for CDO investors, the overall income of this CDO can still cover the losses caused by this part of the default.

Therefore, the investment risk of CDO is not big. On the contrary, the income is relatively stable and much higher than that of ordinary bonds, so it will be welcomed by the market. "

Wu Fei then explained: "What Chen Lan said just now is correct, the U.S. financial market is very developed, behind the popularity of CDO, there is the support of such insurance products as CDS.

The design of the entire CDO product is based on a risk quantification theory and model.

This risk quantification theory, using the Gaussian connection function in mathematical theory, is based on the market price data of CDS. It demonstrates that the correlation of default risk of borrowers with different qualifications in different regions is very low.

Under the support of this theory, asset securitization tools such as CDO, which help banks sell products and recover funds, have relatively limited risks, so they are also welcomed by Wall Street Investment Bank.

The scale of subprime mortgages in the U.S. real estate market is not small. The so-called subprime mortgage refers to the interest rate of loans for house purchases based on personal credit conditions.

People with low credit conditions cannot enjoy preferential mortgage interest rates in banks, so they can only look for subprime mortgages, buy houses with higher loan interest rates, and then work hard and hold several jobs at the same time to earn money to pay back their debts. mortgage.

In the United States, there is a phenomenon that the house is taken away after the mortgage is not paid, but there are not many, because the law is very strict.

Therefore, even if it is the bottom of the middle class, there are very few people who deliberately breach the contract and fail to repay the mortgage on time..."

Wu Fei and his wife continued to popularize the knowledge of CDO, CDS and subprime mortgages for Gao Yang in the US real estate financial market, and Gao Yang was quite happy to hear it.

It's great that these two understand these things better...

(End of this chapter)