Mortgage Backed Securities Explained

The speaker provides a high level overview of mortgage backed securities, how they are formed, and how they became the primer for the economic collapse in Freddie Mac, Fannie Mae and the US economy. 

Loan originators sell mortgages off to investment banks or GSE's like Fannie Mae & Freddie Mac who package these loans up and sell their cash flows off to investors through securities called mortgage backed securities, or MBS for short. 

The issue with these products was brought to light in the credit market meltdown during the 2007 to 2008 timeframe.  Essentially, the subprime mortgages, which were packaged and sold off to investors, started to default at an accelerated rate.  This led to a precipitous drop in the illiquid MBS market which caused a panic selloff, eroding most of their value due to a supply and demand imbalance.  This drasic erosion led to gigantic losses suffered by investment banks and the GSE's which is one of the major causes of this economic crisis.
Tim Ord
Ord Oracle

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