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The Handbook of Financial Instruments by Frank J. Fabozzi

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Chapter 14 Agency Mortgage-Backed Securities

Frank J. Fabozzi, Ph.D., CFA

Adjunct Professor of Finance School of Management Yale University

David Yuen, CFA

Senior Vice President Portfolio Strategist/Risk Manager Franklin Templeton Investments

Real estate backed securities are securities backed by a pool (collection) of mortgage loans. Residential or commercial mortgages can be used as collateral for such securities. Real estate securities backed by residential mortgage loans include mortgage passthrough securities, stripped mortgage-backed securities, and collateralized mortgage obligations. Collectively we refer to these securities as mortgage-backed securities (MBS). In this chapter we describe those issued by either the Government National Mortgage Association (Ginnie Mae), the Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac). For the reasons described later in this chapter, these securities are referred to as agency MBS. In the next chapter, MBS not issued by one of these three entities are described. In Chapter 16 MBS backed by commercial mortgage loans are covered.

WHY IT IS IMPORTANT TO UNDERSTAND REAL ESTATE-BACKED SECURITIES

The U.S. mortgage market is the largest debt market in the world. A major innovation in the U.S. mortgage market has been the development of a wide range of mortgage designs from which borrowers can select. (We’ll discuss the major ones for residential mortgages later in this chapter.) ...

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