Mortgage-backed securities

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Mortgage-backed securities (MBSs)

Securities backed by a pool of mortgage loans.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

Mortgage-Backed Security

A derivative whose value is derived from unpaid mortgages. This entitles the owner to a claim on the principal and interest payments on the particular mortgages backing the security. MBSs pay an interest rate that is usually related to the interest rates the homeowners are paying on their mortgages. The equivalent of the coupon on a mortgage-backed security is a percentage of the interest and principal paid on the mortgages backing the security. An obvious risk to an MBS is the possibility that interest rates may decline, causing homeowners to refinance their mortgages. This provides capital to MBS holders, but it comes at a time when purchasing more MBSs would yield less due to the decline in interest rates. More complicated versions of MBSs include the collateralized mortgage obligation and the mortgage derivative. These attempt to reduce the risk associated with declines in interest rates.

Another risk associated with mortgage-backed securities is the possibility that a substantial number of mortgages will default. A main proximate cause of the credit crunch, which began in 2006-2007, was the fact that many mortgage-backed securities backed by subprime mortgages began to default. See also: Credit risk, Liquidity risk, Credit crunch.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved
References in periodicals archive ?
In the next section, we will describe three channel allocation schemes: FAP-based cognitive channel allocation scheme [5], MBS-based cognitive channel allocation scheme and the proposed flexible channel allocation scheme which allocates channels to new realtime call requests according to interference data measured at both CFAPs and MBSs.
Assume that updating the uplink interference level of MBSs and the QoS of MUs is performed by the interaction/information exchange of MRMS and FMS.
If there is a MU of cellular domain (might belong to other neighbor MBSs) which has QoS violation, the CFAP j will perform the one more attempt of channel allocation by using Step 2 below.
Other variations of MBSs include a collateralized mortgage obligation (CMO), which is formed when payments from a pool of mortgages are divided into different bond classes known as tranches.
Recent years have seen non-agency institutions offer an increasing number of MBSs that are collateralized by subprime mortgage loans.
First, because of the dynamic credit-market environment, the illiquidity of many MBSs backed by subprime loans has created another element of fair value that needs consideration.
The most important perhaps is the omission of any increase in deposits held by issuers of new MBSs. As some issuers draw on bank warehouse credit lines to fund the purchase of mortgages to be assembled into new MBS pools, they may offset part of the bank charges for these lines via earnings credits based on their deposit levels.
8 A small amount of MBSs is issued without agency guarantees.
It is this concept that drives the market price of MBSs the mortgage banker will be selling.
servicing portfolio) can get the Treasury advantage by: * Selling MBSs and buying Treasuries; * Selling MBSs and buying Treasury calls (convexity put), or; * Selling MBS calls and buying Treasury calls (convexity spread).
The secondary market for balloon MBSs continues to grow as Fannie Mae and Freddie Mac accelerate the production of their respective pass-through securities.
(Monthly issuance of seven-year balloon MBSs is depicted in Chart 1, followed by the distribution of pass-through coupons in Chart 2.) Although both agencies have issued seven-year balloon MBSs with coupons throughout the 8.5 to 10 percent range, most of the production (about 90 percent) has been concentrated in the 9 and 9.5 percent coupons.