A statement from 'The Big Short' that got me confused.

[sj.1802]

At the start of the movie Ryan Goslings’ character makes a statment about MBS which is ‘The good thing about MBS is that yield is higher than mortgages and risk is the same’ (something along these lines).
Can someone please explain this?

 

[S2000magician]

Seems like a stupid statement to me; but, then, what does Ryan Goslings know about finance?
A correct statement along these lines would be that MBSs have a lower yield than mortgages (because you’re paying the fee to the servicer), and a substantially lower risk than mortgages (because you’re diversified across hundreds or thousands of mortgages).

 

[Guy]

If we’re talking about something in the B’s then the yield was probably high which was attractive, so basically about the same yield but not exactly because as S2000magician said there’s a service fee. But the risk is significantly reduced or was supposed to be in theory.

 

[dwheats]

I am thinking that the way it would work is if you pooled a bunch of mortgages together and diversified away the idiosyncratic risk, you could take a more subordinated tranche, which would appear to have the similar risk as a standalone mortgage, and it would yield a higher return.

 

[crosstheevil]

Is he comparing MBS and prime mortgages? Anw, it’s a movie which has a bit of hindsight bias …

 

[onlysimon]

he was probably talking about ARM (adjustable rate). e.g. a mortgage at 2% for years, then 5% for 18yrs.
if you are long the pool of mortgages then you receive 2%.
if you are long the appropriate tranche of the MBS, then you get 4.5%.
of course after 2years the returns changed a little..

 

[JSD - NYC]

Was it perhaps talking about lower tranche MBS which were being rated higher than they should have been? That would seem to make it make sense (the sentence, not the practice).