Mortgage-Backed Securities: The Revolution in Real Estate Finance

Abstract

The rapid development of a variety of mortgage-backed securities has led to a radical transformation in real estate finance in recent years: By integrating the mortgage market into the traditional capital markets, these securities have broadened the financial base for home mortgages. During 1978, the $40 billion of mortgagebacked securities issued in this national market financed nearly one quarter of all home loan originations. There are two major types of mortgage-backed securities: bonds with scheduled principal repayments that are secured by mortgage collateral and passthroughs which provide ownership interest in the monthly payments from a pool of mortgages. Until recently, the market has been dominated by the bonds issued by the Federal National Mortgage Association (FNMA or "Fannie Mae") and the pass-through securities guaranteed by the Government National Mortgage Association (GNMA or "Ginnie Mae"), both backed by Government-insured mortgages. However, a variety of mortgage-backed securities are now financing conventional mortgage lending as well. Building on the success of pass-through securities issued by the Federal Home Loan Mortgage Corporation (FHLMC or "Freddie Mac"), pass-throughs backed by conventional loans are now being issued publicly by banks, savings and loan associations, and mortgage companies. Mortgage-related bonds are being used to finance mortgage loan portfolios of thrift institutions and