Financial Institutions, Markets, and Money, Eleventh Edition

CHAPTER NINE

Mortgage Markets

THE MORTGAGE MARKET IS THE largest of the long-term debt markets. At year-end 2010, mortgages outstanding in the United States totaled $13.9 trillion, whereas corporate bonds outstanding totaled only $11.4 trillion.

Mortgages are loans for which the borrower pledges real property as collateral to guarantee that the debt will be repaid. If the borrower does not repay the debt as promised, the collateral can be seized and sold through legal foreclosure; proceeds from the sale help repay the debt. Mortgage loans typically are repaid in monthly installments that include both interest due and repayments of a portion of the principal due on the loan. However, mortgage loan borrowers often repay the full amount due early if they move or refinance the loan.

For many years, mortgages were not traded frequently in the nation's capital markets because people found it expensive to check the creditworthiness of individual borrowers and the collateral value of homes located in many different parts of the country. Furthermore, savers often didn't want to buy securities that paid varying amounts of principal and interest from month to month.

Since the mid-1980s, however, the mortgage market has changed dramatically. Federal insurance, federal agencies, and private insurance now guarantee repayments on mortgages to reduce investors' credit risk. In addition, many types of highly marketable mortgagebacked securities (MBSs) have been developed. Such securities pass ...