Mortgage Backed Securities - what is it?

What is a mortgage backed security? 

 

Packages of originated loans on asset backed securities such as those government sponsored like Fannie Mae can be packaged and sold to investors. These packages are called Mortgage Backed Securities (MBS). Our government historically purchases these mortgage backed securities at certain times.

 

These same mortgage backed securities are a big catalyst of the 2008 crash due  to the quality of the loans being packaged.

 

If you haven’t watched the movie The Big Short, I highly recommend you do.

 

The securities allowed to be sold today are different than in 2008. The only MBS allowed to be sold now are those done by a government-sponsored enterprise (GSE) or a private financial company and they must have been written at a regulated and authorized financial institution. Additionally, only MBS with the top two credit agency ratings are able to be sold.

 

Our government purchasing these MBS takes these loans off the balance sheet of banks, takes on the risk of default, and opens up the lending world for borrowers as banks begin writing. The government bought 600 billion in MBS starting in 2008 and another 752 billion in 2021. It stopped purchasing Spring 2022. Seeing the pattern here?

 

Right now, banks are hurting. Their margins are compressed and their balance sheets are full.