What Is a MortgageBacked Security MBS 1
- The MBS assumes the same characteristics as the collateral that secure the principal and interest payments.
- Bonds that are based on collateral with fixed rates are called fixed rate MBS.
- Bonds that are based on collateral with floating rates are called adjustable rate mortgage-backed securities, or ARMs
- Bonds that are based on collateral with a fixed period and then a floating period of rates are called hybrid MBS. The most common hybrid MBS are 3/1, 5/1, 7/1, and 10/1, meaning a fixed period of 3, 5, 7, and 10 years, respectively, and then a rate reset every year.
- Benefits of securitization to mortgage lenders include:
- More efficient use of capital;
- Increased velocity of origination (origination fee and servicing fee) ;
- Greater balance sheet liquidity;
- Funding diversification;
- Asset-liability management;
- Gain on sale accounting treatment (FAS#125);
- Ability to manage portfolio growth; and
- A business exit strategy.
- Benefits to investors include:
- Yield premium over Treasuries;
- Limited credit risk; and
- Liquidity.
■ MBS are currently the largest component of US fixed income markets based on outstanding balance.
US Treasuries US MBS US Corporates
Source: Federal Reserve Flow of Funds, June 10, 2004, debt growth table
Post a comment