Posted 2 years ago on Aug. 2, 2013, 9:13 p.m. EST by notquite
from Dunmore, PA
This content is user submitted and not an official statement
If a $200K house is taken by eminent domain and only $100K is paid to the bank, are there losers?
Yes, the bank would lose, because $200K in credit was extended as principal, but $200K wasn't paid back. Not only would the bank lose, but the loan was probably aggregated into many others (as tranches of many loans) of securities. So any mutual fund, retirement fund, 401K, IRA, pension fund, etc., that was invested in that security would lose the principal (and maybe the tax payer also if it was government backed as most mortgages are). There are definitely losers and it's not just the banksters. In fact, they're probably the last to lose in the whole chain of events. Ordinary people get the brunt of it, because many people and retirees are invested in funds that invest in mortgage backed securities and they don't even know it.
You wouldn't even know it from reading the fund's prospectus. When you invest in T-Bills and U.S. government treasuries, you're investing in mortgage backed securities.