Mortgage-backed securities began back in the 1980’s allowing companies to purchase several mortgages at one time, rather than as individual transactions. Today, people are unable to adequately make their mortgage payments and the companies who had invested in the mortgage are not receiving a steady payment flow, making the investment far less solvent.  The article below from the Tahoe Bonanza newspaper gives a more detailed account the MBS’s and what the future may hold for them: 

“In October 2008, U.S. President George W. Bush signed into law a bill for $700 billion financial rescue  plan to stabalize the economy.  Among the items the government would be purchasing were “toxic” securities that were festering in the global market.  As part of the bank rescue plan, President Bush requested bids from managers of mortgage-backed securities.

With the historic government intervention, the topic of mortgage-backed securities has been mentioned on many occasions.  They have been a drain on the economy and contributed to this financial crisis, contributing to the insolvency of many banks and investment firms that hve been around for decades.  But many people aren’t quitee sure just what mortgage-backed securities are.

The mortgage-backed securities (MBS) market came inot play in the early 1980’s.  Before then each mortgage was a separate transaction from a bank.  With MBS’s, companies such as the now defunct Bear Stearns or Lehman Brothers buy several mortgages from a primary lender, which is a company from which you actually received your mortgage.  This “pool” of mortgages is used by investment banks that use your monthly payments, and those of thousands of others whose mortgages have been brought out, as they revenue stream to pay investors who have bought chunks of the securities offering. This scenario allows smaller lenders to replenish funds and continue to sell mortgages to the people who want them.  Though many firms dabble in mortgage-backed securities, most MBS’s are issued by the Government National Mortgage Associationn (Ginnie Mae), a U.S. government agency, of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), U.S. government-sponsored enterprises.

In a good economy with a stable housing market and relatively low interest rates, MBS’s may be a sound investment.  Mortgage payments are made on time, and the people or companies that bought the mortgage-backed securities receive a steady stream of payments.  But when the housing market isn’t faring well, interest rates rise, and people who took out “creative mortgages” have trouble making their payments.  As was the case during the latter half of 2008 in the U.S., problems can arise.  Owners of mortgage-backed securities are no longer receiving steady payments, and firms that borrow heavily to finance and purchase of these securites find they cannot remain solvent.  Foreclosures also have a large impact because owners of MBS’s are not receiving any payments.

In time one will see if the housing market, and in turn the mortgage-backed securities market, will stabalize.”

Filed under: LOAN INFORMATION, LOCAL MARKET