Review: INVESTMENT OPTION- MORTGAGE BACKED SECURITIES
Rating: 5 out of 5
Date: 06 1, 2014
Buying Mortgage Backed Securities is basically investing in loans made by financial institutions for the purpose of residential or commercial real estate.  In short, they facilitate the flow of money from Wall Street to Main Street.The two largest institutions in the US mortgage industry are Fannie Mae and Freddie Mac.  You may have heard of them, but probably don’t understand what they do or how important their role is in American homeownership.  Fannie Mae and Freddie Mac are GSEs (government sponsored enterprise).  Both were created by acts of Congress; Fannie Mae (FNM) in 1938, and Freddie Mac (FRE) in 1970.  They are publicly traded companies that were set up to expand affordable housing, their shares trade on the NYSE.  In the summer of 2007 the importance of the two companies was emphasized when all mortgages except those guaranteed by Fannie Mae and Freddie Mac came to a complete standstill.  Later that year Freddie Mac shocked the market by announcing large credit-related losses, effectively demonstrating the enormous risk they could pose to our entire financial system and the American taxpayer.  The implied US government guarantee of Fannie Mae and Freddie Mac securities was forced into reality when the federal government stepped in the following year and placed the two into a conservatorship to be run by the Federal Housing Finance Agency.  Subsequent action:• On June 16, 2010, it was announced that the two GSEs would have their shares delisted from the NYSE.• An August 2012 article in Bloomberg noted that the companies "have drawn $190 billion in aid and paid $46 billion in dividends since being taken over by U.S. regulators in 2008."• On September 24, 2012, a judge dismissed a class-action lawsuit that contended that Freddie Mac made misleading statements about its exposure to risky loans prior to the company's federal takeover.Recently, Mel Watt, the new head of the Federal Housing Finance Agency decided that expanding mortgage credit and repaying taxpayers is a priority for the two agencies since neither would exist today if not for the crisis-era intervention.  While my review has been focused on the two largest issuers of MBSs, Justin Adams does an excellent job in presenting readers with a complete guide to this somewhat complex investment option.  A MUST READ