Analyse that how the USA Government have controlled the Mortgage Backed Securities in the US market?
This report helps us to analyse that how the USA Government have controlled the Mortgage Backed Securities in the US market. It also helps us to see that the Mortgage Backed Securities has more advantageous than the Fixed income trading. This research shows that US Government took the steps to prevent the Mortgage Backed Securities. It also shows that how the US Government uses Fannie Mae, Freddie Mac and Ginnie Mae to control the Mortgage Backed Securities.
Fixed income is source of income from the investment in which the seller or the buyer is bound to pay or earn money of a set sum of money on a fixed schedule. The fixed income did not rise or fall like the dividend paid by the company or the fixed income does not change due to the rise or fall in inflation rate or the interest rate of the country. The fixed income market research obeys the Bloomberg Market. In the year 1992, a magazine was released in the market of United States Of America as Bloomberg magazine. This magazine was released for the users of United States who gambles in the financial market. Fixed income market is bigger than the equity market. This fixed income market is usually played by the organisational investors.
The United States mortgage market in the residential purpose has gone through many commotions during the year 2007 to 2008. The US banks are giving loans to the people by mortgaging the houses with the banks and lending the loans to the people behalf of mortgaging the houses. The banks sell the houses to get liquidity with them. But the economic conditions are so disgrace that the no one in the US wants to buy the houses at a very high cost. This creates the bank to face a lot of trouble. This is because the banks do not have money with them. They converted the money into the assets. This creates an economic problem in United States Of America.
In the capital market, there is various investment strategies which are available in the United States market are being developed by the financial professionals. This capital market allows the traders to invest in many field like equity, debt, forward, option, future and also in bonds.
From the year 2008 financial disorder, several numbers of developments has been restructured like many regulations reformed, developing the United States market structure and also introduced some technological improvement in the market capital. Plenty of Mortgaged Based securities are there in the market of United States (McLean and Nocera, 2010). Mortgaged Backed Securities are based on the loan. In the beginning, the banks of the US or the company who use to give the home loans in the US market uses the home loans then the firm or the US based bank sells the same home loans to the investment bank of the United States, or the agencies for example Freddie Mac, Fannie Mae which are controlled by the United States Government. The Mortgage Based Securities is mainly sold by the Government agencies in United States (McLean and Nocera,2010). This schemes is attracts the traders because of the money back guarantee from the Federal Government. As the Government of United States involves in the matter, the traders also relies on the mortgaged backed securities. This is because the traders know that they will receive a lump sum amount of money back by the Government agencies of Mortgaged Backed Securities.
With the help of types of Mortgage based securities helps the company to get in depth studying of the model of Mortgaged Backed Securities market in the United States of America.
One of the most difficult model is Mortgaged Based Securities. In this MBS market the holder of the mortgage gets the shares from the principal amount to the interest amount.
Mortgage Based Securities are launched in the market by the United States Government to bring revolt in the department of house loan and the US mortgage trade. This MBS market helps the people of the United States to buy the homes in the United States (McLean and Nocera, 2010). During the year 2000 to 2005, the real estate was running their business in the booming condition. That period most of the banks and the mortgages companies has made a lot of profit in the market. But in the year 2007 to 2008, the condition of MBS market went down. The banks of the United States do not have enough liquidity with them. For the volatility of the MBS market condition in the United States, the Government launched three agencies in the market like Ginnie Mae, Fannie Mae, Freddie Mac.
The mortgage backed securities in the home loan purpose are divided in to the two parts:
We should focus on the United States of America mortgage sector (McLean and Nocera, 2010). This is because it plays a very valuable role in the capital market due to its size occupying in the U.S. capital market (Goldmann, 2010).
The fixed income is a market which lies in the edge of rushing into a fundamental industrial change with the rigid drivers throwing the old structure of the market and modernising the structure of the market. Rules are indicating the banks to decrease the money (Goldmann, 2010).
Mortgage Backed Securities is a very important part of the capital market. This mortgage rate defines the rate at which the home owner pays the rate of the interest. Mortgage Backed Securities Valuation is the valuation of a security that can be expressed in the terms of NPV (net present value). The discounting factor is obtainable from the market (Fabozzi and Modigliani, 1992). The time is mentioned by the mortgage company that for the time period a person is taking the mortgage from the market.
Ginnie Mae: Ginnie Mae was the first company that has introduced the MBS in 1968 by the US government national Associations. Ginnie Mae is one of the governmental organisation that issued the MBS back by the credit of US government (Ambrose and Sanders, 2008). Ginnie Mae is ben guaranteed payment of the principal amount along with principal has been one of the pillar of the constructs irrespective of the default in mortgage payments by the borrower (Lugo, 2014).
Fannie Mae: It another major company who issues the MBS and are very much has ethical responsibility of the US government to rate the credit value of the mortgage. The FNMA (Federal National Mortgage association) is very much work on the basis of the treasury regulation of the money market guarded the federal bank of America (Antinolfi and Brunetti, 2010).
Freddie Mac: It is stockholder owned government sponsored corporation that has been formed in order to enhance the mortgage credit and give quick liquidity. It is owned by the federal home loan Mortgage associations and has line of credit with the government of America (Cantor and Hu, 2009).
The three instruments of lending the mortgages is Freddie Mac, Fannie Mae, Ginnie Mae. Freddie Mac mainly enhances the mortgage credit and quickly converts the mortgages into the liquidity assets (Wiedemer et al. 2014). The owner of the Freddie Mac is the federal home loan mortgage association. Fannie Mae is a company who is the leading point of giving liquidity for the residential purpose. Ginnie Mae is also known as the government national mortgage association (Stone and Zissu, 2005). The owner of the Ginnie Mae is federal corporation within the United States. It was launches in the year 1968. The main functions of the Ginnie Mae is to attract new point of getting money in the purpose of hose mortgage purpose (Schofield and Bowler).
The mortgage backed securities have a very volatility in the year 2007 to 2012 (Amerman, 2010). After the year 2012 the mortgage backed securities recovered from high volatility to low volatility by the United States banks. The market backed securities have backed by most bonds.
The market where the traders get into the short position and the traders gets into the long position. A very large number of mortgages are sold in very less amount of money due to lack of liquidity with the banks (Stone and Zissu, 2005). This makes banks sell all the residents taken in mortgages at a very cheaper rate due to lack of liquidity with the bank (Tuckman and Serrat, 2012). The three aspects for giving the price discount on the mortgages residents are:
This are affects which affects the Mortgage Backed Securities the most.
|
Base Currency |
USD |
|
Yield to Maturity |
2.36 % |
|
Yield to Worst |
2.16 % |
|
Spread (OAS) |
21.96 |
|
Average Life |
5.22 |
|
Number of Issues |
473 |
Bloomberg index reflects that the value of the market’s rate of return of maturity is 2.36% according to the combined rating of Ginnie Mae, Freddie Mae and Fannie Mae (Wiedemer et al. 2014). The rating reflects that United States was very fragile in the financial year 2008. The average life of the US MBS is almost 5.22 years as shown in the chart (Tuckman and Serrat, 2012). Yield to maturity means the rate of return is by 2.36%. If the market condition is in very worst condition the rate of return will be 2.36 %. We have seen that the condition of the market when the market is at better condition is 2.36 % and when the market condition is worst still the market have rate of return is 2.36 % (Stone and Zissu, 2005). This shows that the market is at recession period.
The Federal Reserve reported that the deterioration is seen in the market of mortgage backed securities and the Fed is almost buying $ 40 billion in bonds. The dealers almost of 20 % are responded the market in Mortgage backed securities had reduced in the US market (Amerman, 2010).
Mortgage back securities performance in compare top world during 2008 crisis is given below:
|
Looses faced by the companies during 2008 in terms of MBS |
Amount $, Bn |
|
Lehman brothers |
-18.1 |
|
Merrill Lynch |
-8.6 |
|
Barclays |
-2.3 |
|
Wachovia bank |
-8.4 |
|
JP Morgan chase |
-1.3 |
|
Bank of America |
-4.4 |
|
Citi Group |
-9.83 |
During 2008, crisis as per the Bloomberg report, Merrill Lynch reportedly has been confirmed the net loss worth of more than $ 8.6 billion that broke the stock market down. Then there is collapse of the one of the strongest housing mortgage company Lehman brothers who have collapsed due to increase in the default in payments and price of real estate is being lowering done which lead to global catastrophe (Zhou, 2010). As per the bloom index USD MBS is been going through rough phase that point of time. During that period of time, MBS has been able to garnered controversy which tends to lend the subprime crisis. MBS is been one of the part of the subprime lending that start rooting the housing bubble bursts (Goldmann, 2010). Since then the government of treasury has changed the US MBS bond norms and brought more transparency and more of clear concept rather the complex structure which turns into the nightmare for the US and rest of the world.
|
Name |
Values |
Change |
Effective yield |
|
US treasury Bond index |
121.60% |
-0.91 |
1.58% |
|
US agency Bond Index |
116.8% |
-0.44 |
1.45% |
|
US corporate Bond index |
137.50% |
-1.10 |
3.11% |
|
US MBS bond Index |
123.47% |
-0.45 |
2.36% |
|
Fund rate |
0.9 |
||
|
Prime rate |
3.25 |
Graph 1: MBS bond in compare to other bonds
(Source: www.bloomberg.com)
From the graph we can say that the Bloomberg with an analysis on the bonds and MBS are developing slowly in the US market (Wiedemer et al. 2014). The bonds which are given by the corporate have very high rate of return. But the large market shows a very healthy rate of return. So, now we can see that the market is developing vigorously in the capital market. MBS has many benefits. One of the essential importance of MBS has very high quality (Wiedemer et al. 2014).
According to the Ginnie Mc and Freddie Mac, the most advantageous of using MBS market is this market has very high class debt (Tuckman and Serrat, 2012). The owner of this instrument is United States Of Government and this instruments are controlled by the United States Government itself.
Mortgage Based Securities market is a very low risk market if we measure up to the equity or any other types of securities (Stone and Zissu, 2005). This market also gives profitable income. This is because MBS is controlled by the United States Government. And the payment is based on monthly wages.
Income is monthly based: MBS have many benefits in the market. And one of the essential benefits is the return gets by the trader is monthly based whereas, the fixed income trading investors gets the rate of return after a long period of time (Stone and Zissu, 2005). This provides the investor to play in a very low risk. But the investors in the fixed income trading plays in a very high risk. The MBS can be treated as a source of monthly income whereas the fixed income trading does not have this advantage. Once you have invested in the fixed income trading the return the investors will get after a very long time period. Bloomberg’s also shows that the mortgage backed securities is taxable (Goldmann, 2010).
Conclusion:
Fixed income trading is almost same as the mortgage backed securities (MBS). The fixed income trading gives the trader for the long term investment. Whereas the Mortgage Backed Securities have short term securities. The rate of return in the MBS is low whereas the rate of return of fixed income trading is very high. The risk in MBS is very low whereas the risk in the fixed income trading is very high. The risk factor of the MBS is very low whereas the risk factor of the Fixed income trading is very high. The lack of transparency causes the MBS market very complex. In Mortgage backed securities, the returns or the values cannot be measured. From the above research we understood that Mortgage Backed Securities is very valuable market for investment by the investors which is controlled by the United States Government agency. Three key agencies who serves the investor to get a good return from MBS market is Ginnie Mae, Freddie Mac and Fannie Mae. The owner of the three agencies Ginnie Mae, Freddie Mac and Fannie Mae in the MBS market is United States Government. And the three agencies are also controlled by the United States Government.
References:
www.bloomberg.com/news/articles/2013-07-08/fed-says-a-few-dealers-report-deterioration-in-mbs-market [Accessed 7 Mar. 2015].
Goldmann, P. (2010). Fraud in the markets. Hoboken, N.J.: Wiley.
Green, R. (2013). Introduction to Mortgages & Mortgage Backed Securities. Burlington: Elsevier Science.
Wiedemer, R., Wiedemer, D. and Spitzer, C. (2014). Aftershock. Hoboken: Wiley.
Amerman, D. (1993). Mortgage securities. Chicago, Ill.: Probus Pub. Co.
Arditti, F. (1996). Derivatives. Boston: Harvard Business School Press.
Stone, C. and Zissu, A. (2005). The securitization markets handbook. Princeton, NJ: Bloomberg Press.
Amerman, D. (1993). Mortgage securities. Chicago, Ill.: Probus Pub. Co.
Arditti, F. (1996). Derivatives. Boston: Harvard Business School Press.
Fabozzi, F. and Modigliani, F. (1992). Mortgage and mortgage-backed securities markets. Boston, Mass.: Harvard Business School Press.
McLean, B. and Nocera, J. (2010). All the devils are here. New York: Portfolio/Penguin.
Stone, C. and Zissu, A. (2005). The securitization markets handbook. Princeton, NJ: Bloomberg Press.
Batten, J., Fetherston, T. and Szilagyi, P. (2006). Japanese fixed income markets. Amsterdam: Elsevier.
Colin, A. (2005). Fixed income attribution. Hoboken, NJ: Wiley.
Jegadeesh, N. and Tuckman, B. (2000). Advanced fixed income valuation tools. New York: Wiley.
Jha, S. (2011). Interest Rate Markets + Web site. Hoboken: John Wiley & Sons.
Schofield, N. and Bowler, T. (2011). Trading the fixed income, inflation and credit markets. Chichester, West Sussex: Wiley.
Tuckman, B. and Serrat, A. (2012). Fixed income securities. Hoboken, NJ: Wiley.
Amerman, D. (1993). Mortgage securities. Chicago, Ill.: Probus Pub. Co.
Stone, C. and Zissu, A. (2005). The securitization markets handbook. Princeton, NJ: Bloomberg Press.
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