Question

Who are the typical holders of mortgages and mortgage-backed securities? What characteristics of mortgage-backed securities make them attractive to these entities? What entities are involved in the origination of mortgages and the exchange of mortgage-backed securities, and how can industry conditions impact these markets?

Answer 1

Answer: Holders of Mortgage- Mortgage holder is an entity who owns the mortgage loan that is extended to the homeowner. It is a party that has right to collect payments to repay the loan and in the event of default, they are entitled to foreclose on the mortgage.

Holders of Mortgage backed securities- Mortgage backed securities are the investment alternative that is secured by the mortgage. It is an asset backed security. When you are investing into MBS, you are buying right to receive the value of a bundle of mortgage.

Fannie Mae and Freddie Mac are the largest holders of MBS.

Some benefits from MBS- Are as following:

1. MBS provides higher yield than the Government securities. They always offer higher rate of return with the set of risk specified.
2. In MBS, risk can be transferred and diversified.
3. MBS are more efficient and liquid.

Major agencies involved in MBS-

• U.S Government agencies such as Ginnie Mae, Fannie Mae and Freddie Mac.
• Private companies such as subsidiary of investment banks, financial institutions and home builders.