Mortgage-backed Security

Mortgage-Backed Securities are essentially a type of bond made up of principal and/or interest payments from many individual home mortgage loans. Traditionally, they were seen as less risky than other investments because they were secured by the underlying home equity.  But that was before mortgage defaults and foreclosures raised the risk to a level that brought many financial firms down. Today, Mortgage-Backed Securities are referred to as toxic debt.

In the past, most residential Mortgage-Backed Securities were guaranteed by government-sponsored entities, such as Fannie Mae and Freddie Mac, and were expected to meet high standards. But as more and more Mortgage-Backed Securities were issued by private companies that lacked these standards, the market share from smaller firms grew from about 20 percent of all mortgage-backed securities in 2001 to a whopping 56 percent in 2006.

Financial institutions and Wall Street firms were buying up large quantities of home mortgages, which they then securitized—pooled together, packaged and sold as income producing products, or securities, to investors. The marketing concept being that the underlying mortgages would provide an income stream.  The repackaged debt from the pool of mortgages was then traded and re-traded.   As these instruments were moved around, it freed up more funds to lend to more homeowners.

(SeeSecuritization - Securitized)

As news of the mortgage crisis heated up, more investors balked at buying these securities, those selling them were left holding the bag. The meltdown in the value of Mortgage-Backed Securities contributed to more than $300 billion in write-downs by global banks and financial institutions and contributed to the unraveling of the entire U.S. as well as the global economy.