What Are Mortgage Backed Securities?

We discuss mortgage bonds often, probably too often on this site. In the heat of daily trading, especially with the extreme mortgage bond market volatility since August, sometimes we rush past what they actually are in order to make the broader point of how they affect mortgage rates. But here’s a good Slate story on MBS to provide some background. Even they don’t get into specifics as to what securities are created from bonds.

That’s hard to do because, especially in the Jumbo mortgage marketplace, all the MBS securities are custom built and private label. Mostly what we discuss on The Basis Point, unless otherwise stated, are Agency mortgage bonds issued by FNMA, FLHMC and GNMA; and we often discuss the spread between Treasuries and Agency bonds. Agency MBS are built from conforming loans that are bought from lenders by these three agencies. As broad proxies for mortgage rates go, Agency MBS are the most precise indicator–and that goes for Jumbo rates too, since Jumbo loan guidelines are all build off of the Agency mortgage underwriting guidelines.