Mortgage-backed securities
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Mortgage-backed securities are bonds financed by mortgage payments on home loans generated across the country, and usually issued by large government-regulated mortgage-repurchasing agencies like Fannie Mae (FNMA), Ginnie Mae (GNMA) and Freddie Mac (FHLMC).[1]
These securities grew in popularity up until 2007, because they typically provided higher yields than traditional fixed-income securities like treasury bonds because of default and pre-payment risks. However, the market began to collapse in 2007 after defaults on subprime mortgages soared and the securities' underwriters like now-defunct Bear Stearns were forced into huge writedowns.[2]
The mortgage-repurchasing agencies that issued these securities were seized by the U.S. government on Sept. 7, 2008, after the mortgage meltdown and resulting financial crisis had resulted in their portfolios holding trillions of dollars of toxic assets, and policymakers decided they needed restructuring. [3]
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Over-rated
A key factor in these losses were the high ratings awarded mortgage-backed securities by credit-rating agencies like Moody's and Standard & Poor's despite their shaky foundations. Moody's executives have admitted that computer glitches were partly responsible for some incorrect ratings but also blamed issuers for poor information.[4] Subprime mortgages represented about a fifth of the total U.S. mortgage market of $3 trillion in 2007.[5]
Long and short
Despite - or perhaps because of - the market turmoil, BGI iShares in March 2008 launched its iShares Lehman MBS Bond (symbol: MBB),[6] an ETF that tracks the value of outstanding investment grade U.S. mortgage-backed securities in the Lehman Brothers U.S. MBS Fixed-Rate Index. Traders and investors can short the MBB as well as go long, gaining exposure to fixed-income securities and official interest-rates.[7] The fund at inception had $20 million in assets invested in (presumed) triple-A securities issued by Fannie Mae (51%), Freddie Mac (39%) and Ginnie Mae (10%).
Recent News
In March of 2011, the U.S. Treasury announced that they will sell $142 billion portfolio of mortgage-backed securities acquired during the financial crisis. They expected to generate $15-20 billion in profit from the sale that would help reduce the federal deficit.[8] Around the same time, Barclays Capital was considering a purchase of mortgage-backed securities from the Federal Reserve Bank of New York. This was a rival bid for the portfolio AIG valued at $15.7 billion.[9]
References
- ↑ Mortgage-Backed Securities. Fidelity Investments.
- ↑ The financial instrument that destroyed Bear Stearns. Slate.com.
- ↑ The Age of Dominance Reaches Its End for GSEs. American Banker.
- ↑ Moody's Official Concedes Failures in Some Ratings. New York Times.
- ↑ World markets engulfed by US mortgage crisis. The Guardian.
- ↑ iShares Lehman MBS Bond (MBB). Yahoo Finance.
- ↑ Home on the Exchange. Motley Fool.
- ↑ US Treasury eyes $20bn profit on sale of financial crisis securities. FT.
- ↑ Barclays considers bid for US securities. FT.
