Yes, MBS's as they're called on the Street. The same MBS's that everyone blames for the current economic mess. Only this time, those MBS's have been repackaged into much safer investments where they are stress tested to default levels that, if they occurred, the whole economy would be gone and no one would care about MBS's. Personal safety would be a much higher priority.

Current MBS pools work like this: they are divided into several tranches or levels of payments. The most senior piece gets paid first from all monthly mortgage payments. If there is any left over, then the next tranche or level gets paid, and so on down the tranche line. What's different now is that the first tranche or most senior piece of the MBS has almost guaranteed payments unless a severe catastrophe happens. Many are structured so that up to 50% of the pool has to fail before a payment is missed. That means if 50% of the homes in the pool go into foreclosure, the investor still gets his original investment plus the interest.

That makes MBS's very attractive for several reasons. The yields, as mentioned, are well above the current mortgage rates. The pools spread the risk among thousands of borrowers, not a single one and spread the geographic risk as well. These pools are usually being bought well below par (or 100 cents on the dollar, often at discounts of 15% to 20%) so that if all the mortgages perform the investor not only gets a great current yield but also picks up the difference between the 80% to 85% and 100% when the mortgages pay off as in a refinance or the home is sold.

Where do these new MBS's come from? Banks that are getting out of the lending business and just want these loans off the books. Or they are formed from old MBS pools (now called Re-Remics) with credit enhancements that make them much more attractive to investors.

However, the market for these has changed recently. Many investors have discovered the new world of MBS's and bought them. Prices have been firming up and as prices go up, yields go down. So the "easy" money from MBS's is pretty much over. Yields are still good, better than single family loans, but the spreads are narrowing. Once the spread gets narrow or even disappears, direct mortgage loans will pick up considerably, most notably because there are good fees involved in originating mortgages along with the yield.

The second factor weighing on bank management is the need to have enough capital to support investments. Usually a bank can make a loan of about $10 for every $1 of capital it has. The ratio varies widely depending on whether it's a single family loan (12 or 13 to 1) or whether it's a commercial loan or higher risk which requires a much lower ratio. So with the new capital banks now have either from successful equity offerings or from the government, capital ratios are very high. And management wants to keep them that way for a while.

That's because more loan losses are coming, whether in the form of mortgage defaults or credit cards or RV's or equity lines. No one knows how bad things will get because no one knows how many more jobs will be lost. If things get worse, there's no question more defaults will happen. But quantifying that possibility is impossible. To be safe, bank executives are erring on the side of most conservative and "stock" piling capital for the worst possible case.

Since all banks (and thrifts) are open with the blessing of the government, management needs to always keep their regulators comfortable. If a bank's regulators doesn't like the types of assets a bank has or the concentration of them, they have the ability to shut a bank down. One of the most sensitive barometers for a bank's health is its capital position. The more capital a bank has, the safer the bank is because all the loan losses can be borne by the bank. That's important because losses larger than a bank's capital will draw down from the FDIC (Federal Deposit Insurance Corp.), a federal agency that guarantees deposits up to certain levels. Regulators don't like to tap into the FDIC funds. So they keep a close watch on each bank's capital position. And in these troubled times, they are watching very, very closely. Capital is king. Banks are keeping as much of it as they can in case the economy really tanks.

Between the higher yield, safer MBS's and preservation of capital, banks are not in a normal lending mode. Maybe you've noticed. Maybe you've wondered where all the money the banks have received over the last year has gone. More importantly, why it's so hard to get a mortgage or other type of loan. Now you know.

Ted Allrich is the founder of The Online Investor, founder of Allrich Investment Management, LLC, as well as the author of the book Comfort Zone Investing: Build Wealth and Sleep Well at Night. In this weekly column, he'll offer advice to investors who are just getting started.