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]

Over-rated

A key factor in these losses were the high ratings awarded mortgage-backed securities by credit ratings 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]

MBS and the Dodd-Frank Act

The Dodd-Frank Act, signed in 2010, called for new rules on MBS, including certain business conduct standards, reporting requirements, credit risk retention, and a shift from reliance on credit ratings in offerings of non-convertible securities. For more on asset backed securities and credit ratings regulation, visit MarketsReformWiki:

References

  1. Mortgage-Backed Securities. Fidelity Investments.
  2. The financial instrument that destroyed Bear Stearns. Slate.com.
  3. The Age of Dominance Reaches Its End for GSEs. American Banker.
  4. Moody's Official Concedes Failures in Some Ratings. New York Times.
  5. World markets engulfed by US mortgage crisis. The Guardian.