Topic of the Week—Mortgage-Backed Securities

What are mortgage-backed securities?

- Mortgage-backed securities are low-risk investments where banks combine a group of mortgages and offer the cash flow to investors. Mortgages are loans people receive when trying to finance their home. Banks are a large majority of mortgage lenders, and when they group mortgages together and offer them to investors, they are offering a mortgage-backed security. MBS (mortgage-backed securities) hold a very similar concept to bonds. Investors in MBS receive the payments of mortgages and interest. The performance of MBS relies on the mortgages that hold up the MBS, and MBS normally go through certified financial institutions, verifying their safety. There are also two different types of MBS, pass-throughs and collateralized mortgage obligations. One of the main reasons why MBS are so crucial to understand is because of its importance in the 2007 Financial Crisis.

Specifics

1. Pass-Throughs

- Pass-through MBS give the investors the underlying mortgage payments and the interest. The value of these MBS depends on the status of the underlying mortgages and changes in interest rates.

2. Collateralized Mortgage Obligations (CMO)

- CMO MBS differ from pass-throughs in the fact that CMO get categorized in sectors called tranches. The MBS get categorized based on credit rating, duration until maturity, and other factors that define the tranches. The tranches, based on their characteristics, offer different rates.

3. 2007 Financial Crisis

- MBS played a crucial role in the 2007 Financial Crisis. Previous to the crisis, the housing market was on fire. A byproduct of this housing market was an increased demand for MBS, banks handing them out like candy, and the credit rating of mortgages in MBS became futile to some. Mortgage borrowers began to default, and this caused MBS to become extremely overvalued, and banks were overwhelmed with the stress of trying to recover. This was a prominent point in the causes of the 2007 financial crisis.

Work Cited

Kagan, Julia. “Mortgage-Backed Securities (MBS) Definition: Types of Investment.” Investopedia, Investopedia, 18 Jan. 2023, www.investopedia.com/terms/m/mbs.asp.

“What Is a Mortgage? the Basics for Beginners.” What Is A Mortgage And How Do I Get One? | Rocket Mortgage, www.rocketmortgage.com/learn/what-is-a-mortgage.

CodeOverloadCodeOverload 46.4k5454 gold badges131131 silver badges216216 bronze badges, et al. “How Do I Get a YouTube Video Thumbnail from the Youtube API?” Stack Overflow, 1 Jan. 1957, stackoverflow.com/questions/2068344/how-do-i-get-a-youtube-video-thumbnail-from-the-youtube-api.

Team, The AnalystNotes CFA. 2023 CFA Level I Exam: CFA Study Preparation, analystnotes.com/cfa-study-notes-the-standard-normal-distribution.html.

Kadam, Rajeev. “Risk Management.” GlynHolton.com, 19 Jan. 2023, www.glynholton.com/.