August 14, 2020

Friar Finance 101

posted on: Thursday February 18, 2010

MIchael Lepri ’10 / World Staff

Since home foreclosures and mortgage defaults began to increase, the market for Mortgage-Backed Securities (MBS) has struggled. Once one of the most popular types of asset backed financing vehicles, Mortgage-Backed Securities were bought and sold by Wall Street firms, ultimately leading to many going bankrupt or being bailed out when the market collapsed. Securitization is a form of finance in which many similar assets are pooled together in order to distribute risk effectively. For the past two years, the market for MBS has been weak, but Bill Felts, senior vice president at Citigroup Inc.’s mortgage unit, said, “You’re going to see people come to market to some extent but it’s just going to be ‘dipping the toe in the water’ this year…I’m hearing more talk about it.Last year at this time, I wasn’t hearing anything.” Many mortgage and securities units have begun hiring in order to deal with the securitization rebound. Although recent experience has caused many to worry about the future viability of securitized assets, if properly structured they can be very beneficial for borrowers and lenders.Historically, banks and investors would have to hold assets like mortgages until maturity. By extending a longterm loan, like a mortgage, the bank would also need to tie up its funds for a considerable amount of time.With the advent of securitization banks began to sell off big assets, like mortgage loans, and receive cash for them right away. This increased the number of loans that banks were able to make and lowered transactions costs.

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