Background
Mortgage-backed securities (MBS) are a type of asset-backed security that is secured by a collection of mortgage loans. When homeowners make their mortgage payments, that money flows into the pool and subsequently is disbursed to investors based on the structure of the MBS. A critical financial innovation, MBS have played a vital role in modern finance.
Historical Context
The concept of MBS became prominent in the late 20th century, coinciding with the financial deregulation era. The Government National Mortgage Association (Ginnie Mae) guaranteed the first MBS in 1968. Over subsequent decades, Freddie Mac and Fannie Mae, government-sponsored entities, popularized these securities further. However, it was during the 2007-2008 financial crisis that MBS gained wide recognition, often negatively, as poorly managed MBS contributed to the housing market collapse.
Definitions and Concepts
Mortgage-Backed Security (MBS): Debt obligations that represent a claim on the cash flow generated from a pool of mortgage loans. These securities come in various forms, such as pass-throughs and collateralized mortgage obligations (CMOs).
Securitization: The financial process of pooling various forms of debt—including residential mortgages—and selling them as bonds to investors.
Major Analytical Frameworks
Classical Economics
Classical economics often assumes that markets are self-regulating and efficiently allocating resources. From this perspective, MBS serve to distribute the risk of individual mortgages across a broad base of investors, which, in theory, should promote liquidity and stability in the housing market.
Neoclassical Economics
Neoclassical economics might focus on the efficiency and information roles of MBS. The valuation of MBS depends on detailed risk assessment and pricing of mortgage pools, theoretically aligning incentives and improving resource allocation.
Keynesian Economics
A Keynesian approach would delve into the macroeconomic impacts of widespread MBS trading, examining how these securities contribute to aggregate demand fluctuations. Policymakers would be concerned with the systemic risk they introduce, as evidenced during the financial crisis.
Marxian Economics
From a Marxian view, MBS may be critiqued as instruments that prioritize profit over welfare, potentially leading to financial malpractices and crises. The commoditization and trading of loans can be seen as an extension of capitalistic exploitation.
Institutional Economics
Institutional economics views MBS within the framework of legal, regulatory, and social institutions. It might discuss the role of regulatory bodies and financial institutions in ensuring transparency, stability, and fairness in the operation of MBS markets.
Behavioral Economics
Behavioral economics can provide insight into the irrational behaviors of investors and lenders in the context of MBS, including over-optimism and insufficient risk assessment, factors that compounded the 2007-2008 financial crisis.
Post-Keynesian Economics
Post-Keynesian economists focus on the roles of financial markets in influencing aggregate demand conditions. They might analyze how MBS affect macroeconomic stability and distribution through speculative booms and resultant busts.
Austrian Economics
Austrian economists might critique MBS for distorting signals and incentives, leading to malinvestment. The financial crisis can be seen as a result of such distortions where excessive risk-taking and lack of transparency led to economic misallocation.
Development Economics
In the context of development economics, MBS could be analyzed in terms of their effects on housing availability and affordability. Whether these securities benefit broader societal development would be of primary interest.
Monetarism
Monetarists would analyze the impact of MBS in regulating money supply and financial liquidity. They would be concerned with the extent to which MBS trading affects monetary policy transmission mechanisms.
Comparative Analysis
An analysis might compare MBS mechanisms across countries and regulatory environments. Examining how different nations’ regulatory policies affect MBS risk, performance, and investor protection could provide valuable insights.
Case Studies
- 2007-2008 Financial Crisis: A deep dive into how MBS and collateralized debt obligations (CDOs) contributed to the broad economic downturn.
- Freddie Mac and Fannie Mae: Analysis of these institutions’ roles in nurturing the MBS market and their subsequent federal conservatorship.
- Recent Trends: Examining markets post-crisis and how regulatory changes, such as the Dodd-Frank Act, have re-shaped MBS structures and risk profiles.
Suggested Books for Further Studies
- “The Big Short” by Michael Lewis
- “House of Debt” by Atif Mian and Amir Sufi
- “The Great Financial Crisis: Causes and Consequences” by John Bellamy Foster and Fred Magdoff
- “Securitization: Structuring and Investment Analysis
