What is causing a 14% decline in MBS?

What is a Mortgage Backed Security?

A Mortgage Backed Security are shares of a Special Purpose Entity (SPE) that holds mortgages.

Whenever someone buys a home they usually purchase it with a mortgage.

Investment Banks (underwriters) put up the capital and create a mortgage agreement with the home owner.

Banks don’t want to carry the risk of mortgages defaulting so they create a corporation for offloading the risk. The corporation is called a Special Purpose Equity (SPE).

The role of an SPE is to issue shares of the corporation for investors to buy called Mortgage Backed Securities ( MBS ).

Investors in the Mortgage Backed Securities take on the risk for a dividend/yield.

What is causing a 14% decline in MBS?

Back in 2007-2009 was the global financial crisis ( GFC ) as a result of mis-management of MBS industry that sent the world economies in recession and markets declined.

The problem started much earlier leading up to 2005 as new homes were being built and sold at highest levels 1972.

Lenders were essentially giving special promotional rates to any buyers with a pulse called sub-prime.

When these sub-prime mortgages began to default it caused a cascading effect to the entire housing industry.

Today is different, but we may only see the tip of the iceberg.

The Fed began buying and holding MBS after the decline in 2008 and currently holds in the tune of 2.7 Trillion in MBS .

The Fed has started a cycle of tightening and in September will begin unloading their MBS .

New housing starts are down as a result of higher interest rates rising and inflation in commodities like lumber.

Volatility in lumber prices were the first to indicate problems over the last 2 years as prices of lumber fluctuated drastically because of problems with supply and demand .


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