Question

1. What are mortgage-backed securities? Briefly explain how they are derived upon. What specific policy measures has the Federal Reserve taken as a result of the Corona Virus epidemic that affect their market? Why?

Answer 1

A Mortgage backed security or MBS is an asset backet security which is backed by a pool of mortgages. For example- a pool of student loan, car loan or vehicles loan of mutiple people are combined together to form an altogether new security. These securities are further sold and are securitized by the investment banks. MBS are then purchased by the investors in the form of securities. Therefore, the MBS are derived from the pool of mutiple loans, all bundled and securitized by the banks.

Amid Covid-19 on March 23rd, Fed has made this statement - The Federal Reserve will continue to purchase Treasury securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions. They have provided guarantee that the lenders of MBS should be given protection and people impacted shall be provided with forebearnce. The same has been done because MBS market form a major part of the US housing market which constitues around 12-15% to the GDP of US and the prior recession was based on the Housing Market and the inapproporiate use of MBS.