Mortgage-Backed Securities: Products, Structuring, and Analytical Techniques, 2nd Edition

CHAPTER 2

Overview of the Mortgage-Backed Securities Market

The growth of the real estate and primary mortgage markets led, quite naturally, to the rapid expansion of the mortgage-backed securities—or MBS—market. According to the Securities Industry and Financial Markets Association (SIFMA), there were approximately $6.5 trillion in MBS outstanding at the end of the second quarter of 2009, which would make it roughly as large as the Treasury market at that time. The size of the MBS market has forced fixed income investment managers to be cognizant of developments in the MBS markets and sensitive to factors driving MBS issuance and performance.

In the most general sense, originators securitize loans to tap the capital markets for funding and liquidity. Using a business model referenced as “loans-to-bonds,” mortgage lenders accept applications, fund loans, sell them into the capital markets in the form of MBS, and then recycle the resulting proceeds into new lending. Before the development of the MBS markets, lenders made mortgage loans from deposits and typically held the loans in their portfolio. This resulted in periodic shortages of mortgage money when local financial conditions were relatively illiquid; in addition, lenders' profitability was tied to the shape of the yield curve and the ability to earn a spread over funding costs. The development of an actively traded market for mortgage products over the last quarter-century resulted in the growth of a national primary mortgage ...