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    Holaman123's Avatar
    Holaman123 Posts: 1, Reputation: 1
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    #1

    Mar 4, 2016, 06:09 PM
    Asset-Backed-Security's and profit?
    So lets say there's a borrower, he borrows $500,000. The lender agrees to give him the sum and then that becomes a loan. After that the borrower eventually can pay back the loan with interest. Now lets say the lender wants to sell this loan. How does he sell it? Lets say the payback was $510,000 with interest. If he tries to sell his loan to an investor and prices it higher (to make a profit) the investor won't buy it. However if he prices it under he will make a loss. If he prices it the exact price then no one makes anything! Im so confused help! So can anyone explain how Asset Backed Security's or mortgage backed securities work?
    Thanks.
    smoothy's Avatar
    smoothy Posts: 25,495, Reputation: 2853
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    #2

    Mar 4, 2016, 06:40 PM
    He would be selling it at a loss if you consider the ENTIRE life of the loan. But they won't have it that long... they might hypothetically sell it for the value of the full principle and maybe half the future interest. He no has ALL of that money in CASH that he can invest in other ways... and he did make money on it. Having that tied up is lost opportunity... freeing it up would ear a lesser return.. but unless its already a bad debt that needs collected... they wouldn't sell it at a true loss, at that point 10% of something beats zero percent of anything. Which is why bad debts are still sold... and usually for pennies on the dollar.

    The others... to loan the money you normally think of having cash on hand... but the reality is that "cash" is usually something on paper or something else of value that is used as collateral. Assets are more tangible than paper securities...and generally slightly better.

    I'm sure that's not 100% all of it...but it gets you in the right neighborhood.

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