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Mortgage-backed security overview Video Lecture - Economics
FAQs on Mortgage-backed security overview Video Lecture - Economics
| 1. What is a mortgage-backed security? |  |
A mortgage-backed security (MBS) is a type of asset-backed security that is created by pooling together a group of mortgages and selling them to investors. It represents a claim on the cash flows from the pool of mortgages, with the underlying assets being the individual mortgage loans.
| 2. How does a mortgage-backed security work? | |
When a mortgage-backed security is created, the mortgages are packaged together into a pool and divided into smaller units called tranches. These tranches represent different levels of risk and reward. Investors can then buy these tranches, which entitle them to receive a portion of the interest and principal payments made by the homeowners in the mortgage pool.
| 3. What are the benefits of investing in mortgage-backed securities? | |
Investing in mortgage-backed securities can provide several benefits. First, they offer the potential for attractive yields compared to other fixed-income investments. Second, they allow for diversification as the MBS pool consists of various mortgages across different regions and borrower profiles. Finally, MBS can be a way to indirectly invest in the real estate market without the need to directly own properties.
| 4. What are the risks associated with mortgage-backed securities? | |
While mortgage-backed securities can be lucrative, they also carry certain risks. One key risk is prepayment risk, which occurs when homeowners pay off their mortgages early, reducing the expected cash flows to MBS investors. Additionally, there is credit risk, which arises if the homeowners default on their mortgage payments. Changes in interest rates can also impact the value of MBS, as higher rates can reduce the attractiveness of existing mortgage-backed securities.
| 5. How are mortgage-backed securities regulated? | |
Mortgage-backed securities are subject to regulation by various entities. In the United States, the Securities and Exchange Commission (SEC) plays a role in overseeing the issuance and trading of MBS. The Federal Housing Finance Agency (FHFA) also regulates MBS issued by government-sponsored enterprises like Fannie Mae and Freddie Mac. These regulations aim to ensure transparency, disclosure of information, and investor protection in the MBS market.
Text Transcript from Video
Let's say I'm some type of the Investment Bank.
Can I go out there and I buy a whole bunch of mortgages.
So right here are a whole bunch of people's mortgages.
And when I say buy a mortgage
it means the home-owners who borrow the money
instead of the money going to the mortgage broker
whom the home-owner think they got the loan from the servicer
who they think they are paying the check to.
Since I now have bought these mortgages,
I've essentially become the lender to the home-owner,
and so the home-owner's morgage payment
will now come to me the Investment Bank .
So I do this for a bunch of home-owners right over there.
But I don't want to be the end holder of the paper.
I really want to be the intermediary.
So what I do is I set up a Special Purpose Entity,
which is really just a corporation that I set up.
And I stick all of the mortgages inside
that Special Purpose Entity.
So I stick them all inside of that.
So now the Special Purpose Entity is the owner of the mortgages .
The investment bank at least starting off
with all of the shares of the Special Purpose Entity.
And so the Investment Bank could then sell shares.
It could split the Special Purpose Entity
into a million or ten million shares
and then sell those shares to investors.
And these shares would be called Mortgage-Backed Securities.
or sometimes MBSes.
There are a part of a general class called Asset-Backed Securities
because what is going to happen now is that all of this money
flowing from home-owners will go the mortgages
which is now on the Specail Purpose Entity.
So all ended up inside the Special Purpose Entities .
And some of them will default,some of them won't.
But on average this Special Purpose Entity
will then be able to pay a dividend.
Essentially you can almost fueled on interest
to the owner of the Mortgage-Backed Security.
Can I go out there and I buy a whole bunch of mortgages.
So right here are a whole bunch of people's mortgages.
And when I say buy a mortgage
it means the home-owners who borrow the money
instead of the money going to the mortgage broker
whom the home-owner think they got the loan from the servicer
who they think they are paying the check to.
Since I now have bought these mortgages,
I've essentially become the lender to the home-owner,
and so the home-owner's morgage payment
will now come to me the Investment Bank .
So I do this for a bunch of home-owners right over there.
But I don't want to be the end holder of the paper.
I really want to be the intermediary.
So what I do is I set up a Special Purpose Entity,
which is really just a corporation that I set up.
And I stick all of the mortgages inside
that Special Purpose Entity.
So I stick them all inside of that.
So now the Special Purpose Entity is the owner of the mortgages .
The investment bank at least starting off
with all of the shares of the Special Purpose Entity.
And so the Investment Bank could then sell shares.
It could split the Special Purpose Entity
into a million or ten million shares
and then sell those shares to investors.
And these shares would be called Mortgage-Backed Securities.
or sometimes MBSes.
There are a part of a general class called Asset-Backed Securities
because what is going to happen now is that all of this money
flowing from home-owners will go the mortgages
which is now on the Specail Purpose Entity.
So all ended up inside the Special Purpose Entities .
And some of them will default,some of them won't.
But on average this Special Purpose Entity
will then be able to pay a dividend.
Essentially you can almost fueled on interest
to the owner of the Mortgage-Backed Security.
About this Video
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Dec 19, 2024 Last updated |
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