Transparency. You keep hearing the traders and Dylan talk about transparency in mortgage backed securities but what exactly do they mean?
Still reading? Phew! Sounds complicated but it’s really quite simple.
Think back to that high school science class when you first learned objects can either be opaque or transparent. (Okay so they can be translucent too, but that’s for another time).
A Simple Analogy
In much the same way that you can see through a transparent object, if securities are transparent you can see through them too. Everything is visible. Think of a plastic bag. If mortgage back securities were in a plastic bag you’d know what you had.
But right now mortgage backed securities are more like opaque objects, let’s say a shoebox. You have no idea what’s inside. Pretty shoes, ugly shoes, or even sandals. Without knowing what’s in the shoebox, it’s tough to put your money down.
Many investors want to take mortgage-backed securities out of the shoebox and put them in a plastic bag. I know, that’s a little simplistic but it really does illustrate the basic point.
So the question becomes can you trade mortgages like stocks?
According to Jon Najarian, Yes. He advocates a plan called TAC (Transparency Access and Clearing ) “and I think it can be done on an exchange floor by setting a bench mark. And then the security would trade points above and below that bench mark.”
If you’d like to hear all the details of Jon Najarian’s plan please watch the video.