------------------------------------------------------------------------------------------------------------------ This concept is From Fixed Income - Reading 62 LOS (e), Page 49 Last paragraph - Schweser Notes. (Command word ) All the three Government sponsored agencies Ginnie Mae, Fannie Mae and Freddie Mac. EACH PURCHASES MORTGAGES FROM LENDERS to provide funds for mortgage loans. The Agencies issue three types of securities (1) Mortgage pass through securities (2) Collateralized Mortgage Securities (3) Stripped Mortgage Backed Securities. ------------------------------------------------------------------------------------------------------------------ What exactly they mean that purchase mortgages from lenders and provide funds for mortgage loans? I shall really appreciate if anyone please explain this process a bit simpler in steps because this thing is totally new for me
Purchase Mortgages from lenders-- They buy mortgages from the smaller companies (usually operating underneath GNM and FNM) bundle them together then slice the budled mortagages into equal parts and sell the parts of the whole bundle as a MBS (Mortgage Backed Security). Think of it like this; Lets say all the parts of a cake represent all the mortgages for a certain area. Some ingredients more important than other, but in the end they are all represented in the final prodcut. You mix all the ingredients together and, BAM!, you have yourself a cake. Now, this cake not only represents a pooled collection of mortgagtes but it also represents different risk levels (some subprime mortgages, some AAA+ mortgages, however, they are all bundles together). Lets say you go out and get drunk one night and decide you want cake, well, you slice yourself a piece of cake and voila, you have yourself an MBS. You piece of cake represents a sample of the colletive mortgage population represented in the cake you made. As far as providing funds for loans. I know how it works however, I am having trouble writing it out. Hopefully someone else can chime in.
When you take out a loan (mortgage in this case) it is a liability to you, but an asset to the bank. Like any other asset it can be sold. Smaller banks package up a bunch of loans and sell them to the GSEs who then create MBSs.
http://www.youtube.com/watch?v=oosYQHq2hwE Anyway, I think Schweser made an error because Ginnie Mae is not a GSE.
supersunny138, I have written a blog on Mortgage Backed Securities in a simple to understand language, covering just basics. http://sandeep-rastogi-fin.blogspot.com/2009/07/understanding-credit-crisis-academics_4866.html Let me know if it helps.
Thanks guys this stuff was so simplified… Very helpfull we should also let others see who are probably having difficulties understanding this like me. Great link