If many people have a stake in my mortgage, what happens when I make a payment?
Question/Comment: I enjoyed the tutorial tonight. What I want to learn is how these mortgage backed securities pay the folks that hold them. They are pieces of many mortgages, so say I am a homeowner with a mortgage and send someone my $1,000. Does that someone cut it up and send it out to the many people holding a piece of my debt? Thanks.
Paul Solman: I recommend this segment. But your question indicates you may well have seen it. My answer is: there are firms that service your mortgage payments, and mine, etc. They funnel the money to a pool, that then pays the underlying securities backed by those mortgages. (These are mainly computer transfers, remember.) For the CDOs issued against the mortgage-backed securities, same thing. For the CDO squared issued against the CDOs, same thing. As Kurt Vonnegut was fond of saying, so it goes.