Mortgaged Backed Securities Literature review Example | Topics and Well Written Essays - 4750 words

Mortgaged Backed Securities - Literature review Example in that location are three classes of securities issued and traded, and these are assets backed securities (ABS), mortgage-backed securities (MBS) and collateralized debt obligations (CDO) (Blum & Dingell, 1997). As there are some(prenominal) kinds of securities, the primary focus of this section is the securities issues backed by mortgages MBS. Understanding MBS is essential because it represents the largest portion of securitization in the United States (Nomura, 2006). In addition, apprehending MBS enables one to know the opposite forms of securitisation, as MBS is the original source of securitisation technology(Nomura, 2006, p. 2). In this regard, as the aim of the research is to gain a deeper apprehensiveness of MBS and to know the correlation between MBS and Subprime crisis, this segment of the research will be divided into four sections. The start-off part will deal with the concept of MBS. This includes the elucida tion of the structures, benefits and risks attributed to MBS. The second section will be delving on the credit rating analysis of MBS while the third part will deal with the development of MBS in the United States and its primordial role in the subprime crisis. Finally, the fourth section will be the summary. Mortgage-Backed Securities Mortgages are loanwords issued against in truth estate (Hu, 2001). This serves as the backbone of MBS (Stein, Belikoff, Levin & Tian, 2010). As such, a brief discussion of mortgage loans is provided, since, it serves as the check out with which MBS works or thrives. Mortgage loans in the United States are normally fixed in 30-year defrayal plan. This means that 360 equal payments are to be made by the borrower within that payment scheme. It is assumed in fixed payment that after the 30 year period both the principal and the interests are pay (Stein et al., 2010). An important facet of mortgage loan is the borrowers aright to prepay his loan. This means that when the interest rate fall, the borrower female genitalia have the option of refinancing his loan at a lower rate. While, when the interest rates increase, the borrower can locked-in at a lower rate. Although the fixed-rate mortgage loan is most common mortgage loan, there is excessively the adaptable-rate mortgage loan (ARM) and the hybrid. ARM offers borrowers the chance to choose a loan that has an adjustable interest rate. The adjustable interests rate can be annually or semi-annually and it is determined by published market index number like yields on US Treasury securities. In order to encourage borrowers, some lenders use ribbing rates. Teaser rates are low initial rates, which last until the first adjustments (Nomura, 2006). On the other hand, the hybrid is the combination of fixed rate and ARM. The scheme provides for fixed interests rate for a first several years and then it is converted into semi-annual or annual adjustable rate. Several plans have been offered under the hybrid. There is 5/1, 7/1 and the 10/1 hybrids. However, regardless whether it is ARM or hybrid, what is monumental is that, just like fixed rate loan , these types of mortgage loans allows or provides the opportunity to the borrower the prepay the loan when the conditions are favourable to the borrower. In this sense, there are two important elements in mortgage loans. First, is the evidence of the borrowers obligation to make 360 monthly equal payments for a period of 30-years and second is the borrowers right to prepay the loan when conditions are favourable, which means that borrowers can prepay their mortgage balance in well(p) or in part anytime (Gangwani, 1998) Mortgage Backed Securities In focus MBS are asset