MBSD Introductory Topics
Introduction to MBSD
If you are new to the Mortgage-Backed Securities industry we recommend you review the articles that appear below before using the menu at left to explore MBSD's services in greater detail. We have arranged this introductory content in the order we think will best benefit you, top-to-bottom. Be sure you are logged in, then scroll down and expand the collapsed articles below to continue.
Quick Note About Rulebooks
The FICC/MBSD has two rulebooks, the Clearing Rules and the EPN Rules. The Clearing Rules encompass the MBSD’s trade guaranty and CCP Clearing, Novation, TBA and Pool Netting services. Clearing members must also be EPN users and thus must adhere to the EPN rules with respect to that service. Access these FICC rulebooks in the By-Laws, Rules and Procedures section of dtcc.com (look for Fixed Income Clearing Corporation (FICC) on that page).
Be sure to check out the "MBSD Trade Lifecycle Activity Tutorial" which provides animated walkthroughs of the MBSD Trade Lifecycle for various trade types, available in the MBSD Processes article further down on this page.
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A mortgage-backed security represents an ownership interest in mortgage loans made by financial institutions to finance a borrower’s purchase of a home or other real estate. Mortgage-backed securities are created when mortgage loans are packaged, or “pooled,” by issuers or servicers, and securities are issued for sale to investors. As the underlying mortgage loans are paid off by the borrowers, the investors in the securities receive payments of interest and principal.
Mortgage-backed securities play a crucial role in the availability and cost of housing in the United States. The ability to securitize mortgage loans enables mortgage lenders and mortgage bankers to access a larger reservoir of capital, which makes financing available to home buyers at lower costs and spreads the flow of funds to areas of the country where capital may be scarce.
Asset securitization began when the first mortgage pass-through security was issued in 1970, with a guarantee by the Government National Mortgage Association (“GNMA” or “Ginnie Mae”). The most basic mortgage-backed securities, known as pass-throughs or participation certificates (“PCs”), represent a direct ownership interest in a pool of mortgage loans. Shortly after this issuance, both the Federal Home Loan Mortgage Corporation (“FHMLC” or “Freddie Mac”) and Federal National Mortgage Association (“FNMA” or “Fannie Mae”) began issuing mortgage-backed securities.
Although mortgage-backed securities are fixed-income securities that entitle investors to payments of principal and interest, they differ from corporate and Treasury securities in significant ways. With a mortgage-backed security, the ultimate borrower is the homeowner who takes on a mortgage loan. Because the homeowner’s monthly payments include both interest and principal, the mortgage-backed security investor’s principal is returned over the life of the security, or amortized, rather than repaid in a single lump sum at maturity.
Mortgage-backed securities provide payments to investors that include varying amounts of both principal and interest, due to the flexibility that the homeowner has in being able to pay more than the minimum payment required by the loan agreement. As the principal is repaid, or prepaid, interest payments become smaller because the payments are based on a lower amount of outstanding principal. In addition, while most bonds pay interest semiannually, mortgage-backed securities may pay interest and principal monthly, quarterly or semiannually, depending on the structure and terms of the issue. Most mortgage pass-through securities are based on fixed-rate mortgage loans with an original maturity of 30 years, but typically most of these loans will be paid off much earlier.
Be sure to view the MBSD Glossary of Important Terms for more information.
After reviewing these introductory articles, we recommend accessing the menu at left (beginning with MBSD Services) to learn more.