Session 15 • Mortgage & Securitization (MBS)
Pass-throughs, prepayments, agency vs non-agency, pipeline, who the big players are, 2008 lessons, what’s hot now, and why MBS differ from Treasuries.
0) MBS 101 — fast, plain-English
- Mortgage-Backed Security (MBS) = a bond made from many home loans.
- Pass-throughs: monthly homeowner payments (interest + principal) flow to investors.
- Why bundle? Diversify across many borrowers; standardize; trade as a single security.
- Main flavors: Agency (Ginnie/Fannie/Freddie) vs Non-Agency (private label).
Key idea: In MBS, you don’t just get coupons—you also get principal back early when people refinance or sell. That early payback is “prepayment.”
1) Who are the players?
| Role | Who |
|---|---|
| Borrower | Homeowner (pays monthly P&I, taxes/insurance via escrow) |
| Originator | Banks & non-bank lenders (Rocket, UWM, etc.) |
| Aggregator/Issuer | Large banks, GSEs (Fannie/Freddie), Ginnie program issuers |
| Guarantor | Ginnie Mae (explicit gov’t), Fannie/Freddie (GSE guarantee) |
| Servicer | Collects payments, manages escrow, handles delinquencies; MSR = servicing right |
| Investor | Banks, insurers, asset managers, hedge funds, and increasingly PE-backed funds |
How big/important?
- Mortgages are one of the largest fixed-income markets in the U.S.
- MBS spreads and prepayment behavior matter for rates, bank balance sheets, and Fed policy transmission.
- Housing is a core macro channel—mortgage costs drive affordability and refi waves.
2) How a loan becomes a bond (pipeline explorer)
Risk hand-offs: underwriting → pooling/standardizing → (often) guarantee → investors take rate/prepayment risk; servicer handles cash-flows.
3) Agency vs. Non-Agency (quick compare)
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Cheat sheet:
- Agency = strong guarantee of timely principal & interest (credit losses shifted).
- Non-Agency = investor carries credit risk (uses structures like tranches/credit support).
- Both face prepayment and interest-rate dynamics.
4) Prepayment & “convexity” — no math
SlowAverageFast
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Intuition:
- Rates fall → refis up → principal returns early (you lose future higher coupons).
- Rates rise → refis dry up → you’re stuck earning a below-market rate longer (extension risk).
- This twisty response is the “convexity” story.
Visual: Rates vs Prepayments (use the slider above)
Prepayment “packets” moving to you
Rates ↓ → refis ↑ → dots move faster
Rates ↑ → refis ↓ → dots move slower
5) TBA market — how most agency MBS trade
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Why it exists: Standardization + liquidity. Exact loans get delivered later as long as they meet the agreed specs.
6) MBS vs Treasuries — what’s different?
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7) 2008: what went wrong (short & sober)
Core issues (then):
- Lax underwriting (e.g., “no-doc/NINJA” loans) + speculative lending.
- Private-label structures that didn’t absorb losses as modeled.
- Rating failures and risk underestimated by many participants.
- Short-funding complex products → runs when confidence cracked.
What changed after:
- Stricter underwriting & ability-to-repay rules (plain W-2 + docs).
- GSE reforms; capital/liquidity changes for banks; more oversight.
- Agency MBS stayed the standard core; private-label came back smaller & more specialized.
8) Today’s watchlist (what people monitor)
Pick one or more…
Important: The MBS market today is dominated by agency paper. Private-label & other ABS sectors (like subprime auto) are separate securitization markets with their own cycles.
9) What happens to your mortgage?
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MSR (Mortgage Servicing Right): the right to service your loan is often bought/sold. Your loan terms don’t change if the servicer changes; the payment address and app may.
10) Homework — Debate (no math)
Prompt A “Should the U.S. rely this much on securitization for housing finance?”
- Pro: Liquidity, lower rates for borrowers, risk distribution, standardization.
- Con: Model risk, prepayment complexity, moral-hazard if guarantees are mispriced.
- Your task: One benefit, one cost, one policy tweak you’d support.
Prompt B “Private equity in single-family rentals: net positive or negative?”
- Pro: Capital for new supply, professional management, scale efficiencies.
- Con: Local competition with buyers, rent dynamics, community concerns.
- Your task: Define a trade-off and propose one guardrail.
How to submit: 2–3 paragraphs, plain English, one near-term and one longer-run point, plus a concluding policy suggestion. Cite one source if you use a fact.
Ready to check your understanding?
15 quick questions • no math • takes just a few minutes.