Question by mercymercy: How do mortgage backed securities work?
Best answer:
Answer by Net Advisor
“Mortgage-backed securities (MBS) are debt obligations that represent claims to the cash flows from pools of mortgage loans, most commonly on residential property.”
They are purchased from banks, mortgage companies, and other originators and then assembled into pools by a governmental, quasi-governmental, or private entity. A company sells securities (bonds) that are backed by principal and interest payments made by people who make payments on home loans. This process is called, “securitization.”
In the event of default, the bond holders lose money. Too many people assumed factors that would never happen.
1. Real estate prices could never fall.
2. Interest rates won’t go up.
Result (in short). During 2004-2006, The FED raised the Fed Funds Rate 425%. The result caused a massive credit squeeze where people with adjustable and higher risk mortgages began defaulting. The result created foreclosures, and this began to feed on itself.
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