A mortgage-backed security (MBS) is a type of asset-backed security that
is secured by a mortgage, or more commonly a collection ("pool") of
sometimes hundreds of mortgages. The mortgages are sold to a financial
institution (a government agency or investment bank) that "securitizes",
or packages, the loans together into a security that can be sold to
investors. The mortgages of a MBS may be residential or commercial; in
the United States they may be issued by structures set up by
government-sponsored enterprises like Fannie Mae or Freddie Mac, or they
can be "private-label", issued by structures set up by investment
banks. The structure of the MBS may be known as "pass-through", where
the interest and principal payments from the borrower or homebuyer pass
through it to the MBS holder, or it may be more complex, made up of a
pool of other MBSs. Other types of MBS include collateralized mortgage
obligations (CMOs, often structured as real estate mortgage investment
conduits) and collateralized debt obligations (CDOs).[1]
The shares
of subprime MBSs issued by various structures, such as CMOs, are not
identical but rather issued as tranches (French for "slices"), each with
a different level of priority in the debt repayment stream, giving them
different levels of risk and reward. Tranches—especially the
lower-priority, higher-interest tranches—of a MBS are/were often further
repackaged and resold as collaterized debt obligations.[2] These
subprime MBSs issued by investment banks were a major issue in the
subprime mortgage crisis of 2006--8.
The total face value of a MBS
decreases over time, because like mortgages, and unlike bonds, and most
other fixed-income securities, the principal in a MBS is not paid back
as a single payment to the bond holder at maturity but is rather paid
along with the interest in each periodic payment (monthly, quarterly,
etc.). This decrease in face value is measured by the MBS's "factor",
the percentage of the original "face" that remains to be repaid.
Low-quality
mortgage-backed securities backed by subprime mortgages played a major
role in the 2007--12 global financial crisis. By 2012 the market for
high-quality mortgage-backed securities had recovered and was a profit
center for US banks.
Critics have suggested that the complexity
inherent in securitization can limit investors' ability to monitor
risks, and that competitive securitization markets with multiple
securitizers may be particularly prone to sharp declines in underwriting
standards. Private, competitive mortgage securitization is believed to
have played an important role in the US subprime mortgage crisis.[40] In
addition, off--balance sheet treatment for securitizations coupled with
guarantees from the issuer are said to make the securitizing firm's
leverage less transparent, thereby facilitating risky capital structures
and allowing credit risk underpricing. Off--balance sheet
securitizations are believed to have played a large role in the high
leverage ratio of US financial institutions before the financial crisis.
One
critical component of the securitization system in the US market is the
Mortgage Electronic Registration Systems (MERS) created in 1990s, which
created a private system wherein underlying mortgages were assigned and
reassigned outside of the traditional county-level recording process.
The legitimacy and overall accuracy of this alternative recording system
have faced serious challenges with the onset of the mortgage crisis: as
the US courts flood with foreclosure cases, the inadequacies of the
MERS model are being exposed, and both local and federal governments
have begun to take action through suits of their own and the refusal (in
some jurisdictions) of the courts to recognize the legal authority of
MERS assignments. The assignment of mortgage (deed of trust) and note
(obligation to pay the debt) paperwork outside of the traditional US
county courts (and without recordation fee payment) is subject to legal
challenge. Legal inconsistencies in MERS originally appeared trivial,
but they may reflect dysfunctionality in the entire US mortgage
securitization industry.
http://en.wikipedia.org/wiki/Mortgage...
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