Page 229 - A Canuck's Guide to Financial Literacy 2020
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Mortgage Backed Securities
Mortgage loans are excluded in the securitization process and are not considered asset
backed securities as they can be packaged and sold as a “mortgage-backed security.”
Mortgage backed securities have long been blamed for the 2008 Financial Crisis, also
known as the subprime mortgage crisis. Large pools of mortgages were packaged together
and sold to various institutional, corporate and individual investors. The housing bubble
caused a large decline in home prices which in turn led to mortgage delinquencies,
foreclosures and devaluation of housing related projects.
When a corporation purchases an MBS, they have the right to receive the monthly
mortgage payments that come with it. The value of the MBS is based on the quality of the
underlying asset. During the collapse of 2008, many banks were issuing low quality
mortgages which led to higher rate of defaults.
