Dect. 31, 2009 Financial Institutions & Markets, Day 10 Add 1 Financial Institutions and Markets Fall 2009 Dr. Andrew L. H. Parkes Day 10 - MBS “How do financial markets work?” 卜安吉

Dect. 31, 2009 Financial Institutions & Markets, Day 10 Add2 What Does Mortgage-Backed Security - MBS Mean? A type of asset-backed security that is secured by a mortgage or collection of mortgages. These securities must also be grouped in one of the top two ratings as determined by a accredited credit rating agency, and usually pay periodic payments that are similar to coupon payments. Furthermore, the mortgage must have originated from a regulated and authorized financial institution. Also known as a "mortgage-related security" or a "mortgage pass through".

Dect. 31, 2009 Financial Institutions & Markets, Day 10 Add3 Investopedia explains Mortgage- Backed Security - MBS... When you invest in a mortgage-backed security you are essentially lending money to a home buyer or business. An MBS is a way for a smaller regional bank to lend mortgages to its customers without having to worry about whether the customers have the assets to cover the loan. Instead, the bank acts as a middleman between the home buyer and the investment markets. This type of security is also commonly used to redirect the interest and principal payments from the pool of mortgages to shareholders. These payments can be further broken down into different classes of securities, depending on the riskiness of different mortgages as they are classified under the MBS.

Dect. 31, 2009 Financial Institutions & Markets, Day 10 Add4 What Does Pass-Through Rate Mean? The rate on a securitized asset pool - such as a mortgage-backed security (MBS) - that is "passed-through" to investors once management fees and guarantee fees have been paid to the securitizing corporation. The pass-through rate (also known as the coupon rate for the MBS) will be lower than the interest rate on the individual securities within the offering.

Dect. 31, 2009 Financial Institutions & Markets, Day 10 Add5 Investopedia explains Pass- Through Rate... For example, suppose that an agency takes two million dollars' worth of mortgage loans, each of which pays 6% interest, and turns them into a 5.5% mortgage-backed security. The 5.5% reflects the pass-through rate, and the agency takes the remaining 0.5% as a cut of the proceeds. The largest issuers of securitized assets are the Sallie Mae, Fannie Mae and Freddie Mac corporations. While these companies are for- profit business, their guarantees are backed by the U.S. government, giving them high credit ratings. For example, suppose that an agency takes two million dollars' worth of mortgage loans, each of which pays 6% interest, and turns them into a 5.5% mortgage-backed security. The 5.5% reflects the pass-through rate, and the agency takes the remaining 0.5% as a cut of the proceeds. The largest issuers of securitized assets are the Sallie Mae, Fannie Mae and Freddie Mac corporations. While these companies are for- profit business, their guarantees are backed by the U.S. government, giving them high credit ratings.

Dect. 31, 2009 Financial Institutions & Markets, Day 10 Add6 Quote of the Day – Jan. 3, 2009 "Of the billionaires I have known, money just brings out the basic traits in them. If they were jerks before they had money, they are simply jerks with a billion dollars." "Of the billionaires I have known, money just brings out the basic traits in them. If they were jerks before they had money, they are simply jerks with a billion dollars." - Warren Buffett From investopedia.com