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Comment by bloomingkales | Hacker News Reader

Let me add my own analogy:

Imagine a fund with a 100 people in it that need a 100k each to goto medical school. What are the chances all 100 people become doctors? Who cares.

Tell people you have a fund with DOCTORS in it. Woah, a whole fund of doctors. Bundle all the loans given to the med students into a financial instrument that you price at it 5% more. Sell off the financial vehicle, remove the liability of human failure (yall ain’t all gonna become doctors).

Collect my 5% profit, do that shit again, at scale.

Hope all those doctors become doctors, I personally don’t care. Ya feel me?

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> Sell off the financial vehicle, remove the liability of human failure

Why would a buyer want to take that fund off your hands? Why do they think the fund will generate good returns and you sold it to them at a good price? What is guaranteeing/backing the fund?

Just because you declare an asset for sale, it doesn't mean buyers magically appear to take it from you - especially not at the price you're hoping for. The buyer must personally expect a higher value from the asset than the price you set.

Typically loan packagers use some law of large numbers type math to at least make the marketing attractive enough. Obviously this can blow up (see: 2008 GFC: MBS, CDOs, CDO^2, etc).

The attraction to investors is something like - doctors are paying 7% interest on their loans, government 10~30yr treasuries are yielding 4.5-5%. Individual doctors have a much higher risk of defaulting than the US government. If you pull 1000s of them together, some will still default but you need like 30%+ of them to default for the increased yield to not reward you for the risk. For certain types of investors (pensions, insurance companies, etc) having something that pays a little more than "risk free rate" without taking on too much risk is a big benefit.

Someone who knows fixed income more than me may chime in with lots of other nuances like early repayment risk, forbearance, re-financing, loan modifications, etc but this is the general framework.

And the guys structuring these things make money off commissions on sale, making a market between buyers&sellers of these products (the spread) and probably some some sort of management fees.

> Why would a buyer want to take that fund off your hands? Why do they think the fund will generate good returns and you sold it to them at a good price? What is guaranteeing/backing the fund?

With the hopes of selling it off to the next guy for more. There's nothing backing crypto either.

These are rational hopes, because a lot of people played that game of hot potato and got rich. And in the end, the government bought all of that trash at par and nobody went to jail.

I worked in auction-rate municipal bonds when the (first and last) auction failed. People thought they were going to jail. They knew they had been selling garbage. And to little towns for their teacher's retirement funds at that.

The buyer of that pool of loans will be an institutional investor with an allocation for that kind of risk. Depending on the state of the market, the pool might be sold at a discount or a premium which may attract/deter certain investors.

Separately, pooling loans generally makes the aggregate product less sensitive to default risk because you're talking about many loans instead of just one.

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