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 goverment-regulated mortgage-repurchasing agencies like Fannie Mae (FNMA), Ginnie Mae (GNMA) and Freddie Mac (FHLMC).[1]
These securities had until recently grown in popularity because they typically provided higher yields than traditional fixed-income securities like treasury bonds because of default and pre-payment risks. The market collapsed in 2007 after defaults on subprime mortgages soared and the securities' underwriters like now-defunct Bear Stearns were forced into huge writedowns.[2]
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.[3] Subprime mortgages represented about a fifth of the total U.S. mortgage market of $3 trillion in 2007.[4]
Long and short
Despite - or perhaps because of - the market turmoil, BGI iShares in March 2008 launched its iShares Lehman MBS Bond (symbol: MBB),[5] 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.[6] 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%).
References
- ↑ Mortgage-Backed Securities. Fidelity Investments. Retrieved on June 23, 2008.
- ↑ The financial instrument that destroyed Bear Stearns. Slate.com. Retrieved on June 23, 2008.
- ↑ Moody's Official Concedes Failures in Some Ratings. New York Times. Retrieved on June 23, 2008.
- ↑ World markets engulfed by US mortgage crisis. The Guardian. Retrieved on June 23, 2008.
- ↑ iShares Lehman MBS Bond (MBB). Yahoo Finance. Retrieved on June 23, 2008.
- ↑ Home on the Exchange. Motley Fool. Retrieved on June 23, 2008.
