The Village That Sold Its Houses Twice: A Story of Mortgage-Backed Securities
In a peaceful village named Shantipur, people dreamed of owning their own homes. But houses were expensive, and most villagers didn’t have enough savings to buy one outright.
Luckily, a kind banker named Rajiv ran Shantipur Bank, which gave home loans to the villagers.
🏡 How It Started: Giving Home Loans
One day, Ramesh, a hardworking farmer, wanted to buy a house worth ₹10 lakh.
🔹 He borrowed ₹10 lakh from Rajiv’s bank.
🔹 In return, he promised to repay ₹20,000 every month for 30 years.
🔹 Rajiv held on to Ramesh’s loan papers (mortgage) as security.
This was good business for Rajiv! The bank earned interest while helping people buy homes.
Soon, hundreds of villagers took home loans, and the bank was thriving.
💰 The Bank Runs Out of Money
After a year, Shantipur Bank had given out so many loans that it ran out of cash.
Rajiv was worried. He couldn’t lend more money unless he got new funds.
That’s when a sharp investor named Vikram from the city visited Shantipur. He had an idea.
📜 The Brilliant Idea: Selling the Loans
Vikram told Rajiv:
"You have all these home loans. They are valuable! People are repaying them every month. Why don’t you sell them to me?"
Rajiv was confused. "Sell loans? But how?"
Vikram explained:
1️⃣ Bundle the home loans together into a financial product.
2️⃣ Sell parts of this bundle to investors.
3️⃣ Investors will receive the monthly payments from homeowners.
This new product was called a Mortgage-Backed Security (MBS)—a way to sell home loans as investments.
🏦 How Mortgage-Backed Securities (MBS) Work
Rajiv bundled 100 home loans together (each homeowner still owed money).
🔹 He sold this bundle to Vikram’s investment firm.
🔹 In return, Vikram gave Shantipur Bank ₹10 crore to issue new home loans.
🔹 Now, Vikram and his investors collected the monthly loan payments from homeowners.
Rajiv was thrilled! His bank got fresh money to lend, and investors earned profits from home loan payments.
📉 The Downfall: What Went Wrong?
For a while, everyone was happy. But soon, greedy banks started giving loans to people who couldn’t afford them.
🔹 Some borrowers stopped paying their mortgages.
🔹 Investors who bought MBS stopped getting their returns.
🔹 This caused a massive financial crash—just like what happened in 2008.
Banks had sold risky loans, thinking house prices would always rise. But when prices fell, the entire system collapsed.
🎯 The Lesson?
✔ Mortgage-Backed Securities (MBS) are bundles of home loans sold as investments.
✔ They help banks free up money to give more loans.
✔ If the homebuyers can’t pay, the whole system can collapse (like 2008).
✔ Good when used wisely, dangerous when misused.
In the end, Shantipur survived because Rajiv was careful about who he lent money to. But in the big cities, banks weren’t as cautious—and they paid the price.
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