Explanation: Mortgage-backed securities (AKA MBS’s)
I came across this blog yesterday and started sifting through the postings. This site does an excellent job of providing educational postings covering various topics in the mortgage industry.
Specifically, I really liked this posting which explains the factors that contributed to the development of the mortgage-backed bond market. I also blogged about this topic around the time when speculation over the insolvency of Fannie Mae and Freddie Mac was hitting the news.
Essentially, mortgage-backed bonds were originally developed to “spread risk” among many financial institutions back when the banking industry was made up of many regional banks. The need to spread risk was needed because regional banks were too leveraged to the local economy they did business in.
However, over the years the development of the mortgage-backed bond market (AKA “securitization”) has encouraged bankers to place emphasis on loan volume instead of loan quality. Thus, we find ourselves in the mess we’re in today.