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Mortgage-backed securities are also issued by aggregators such as Fannie Mae or Freddie Mac. Regardless, the result is the same: A new security is created, backed up by the claims against the mortgagors' assets.

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Shares of this security can be sold to participants in the secondary mortgage market. For a one-stop shop on subprime mortgages , the secondary market and the subprime meltdown , check out the Subprime Mortgages Feature. There are multiple kinds of MBS: pass-throughs, a simple variety in which mortgage payments are gathered and passed through to investors, and CMOs. CMOs break the mortgage pool into a number of different parts, referred to as tranches. This spreads the risk of default around, similar to how standard portfolio diversification works.


The tranches can be structured in virtually any way that the issuer sees fit, allowing a single MBS to be tailored for a variety of risk tolerance profiles. Pension funds will typically invest in high-credit rated mortgage-backed securities, while hedge funds will seek higher returns by investing in those with low credit ratings. Investing Essentials. Real Estate Investing. Investopedia uses cookies to provide you with a great user experience. By using Investopedia, you accept our.

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Compare Investment Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Indeed, inconsistent treatment of securitizations could foster regulatory arbitrage. Determining how to implement an approach could be an involved process as well. Other critical issues include disclosure requirements, criteria for a review of securitizations in the event of delinquent payments to note holders, and attendant dispute resolution upon such occurrence. Complicated as well are the new due diligence and reporting requirements specified under the new rules of the Nationally Recognized Statistical Rating Organizations. When those are coupled with the new issuer risk retention requirements, they should deter fraud at the point of asset origination and pooling. High-quality securitization proposals that emphasize simplicity over complexity may well stifle originality and creativity.

Securitization misconduct that led to the financial crisis arose from moral hazard in the loan creation process, not complexity, in most instances. Regulation has come a long way in remedying such problems through greater issuer and third-party due diligence disclosure along with risk retention and rating agency accountability.

A thoughtful evaluation of securitization in the wake of the financial crisis entails a detailed evaluation of numerous topics. Institutional players in this space would need to understand the nuances of the myriad issues surrounding transparency and issuance and how a surfeit of regulation could produce undesirable results. Rather than a research process, the authors offer numerous scenarios and examples of issues surrounding regulatory reform born of their experience in regulation, analysis, and oversight.

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Such narrative only underscores the varied nature of securitization markets, the regulatory sphere within which they fall, and the difficulty of reconciling their treatment under a common umbrella. Balancing the desire for growth with the need for quality assurance in the securitization market, practitioners and regulators would be smart to take things slowly. Developing a uniformly agreed-on process is quite difficult. Implementing it consistently across regulatory regimes is fraught with obstacles. Any quality assurance initiative could actually constrain issuance by causing prospective buyers to focus only on those products that afford the purchasing financial institution preferential capital treatment to the exclusion of many otherwise deserving structures.

A common set of standards across countries in the OECD would be desirable. We were not able to record your CE credits. Please try again. Contact us if you continue to see this message. Your CE credits have been recorded. Manage your Continuing Education credits.

What happen to all the loans that banks make? Securitization, that's what.

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