Mortgaged Backed Securities - Literature review Example

?Mortgaged Backed Securities: Literature Review Introduction Securitisation is an accepted technique developed to “finance collection of assets whichby their very nature are non-tradable and therefore non-liquid” (Vink & Thibeault, 2008, p. 3). In this way, repayment depends only on the amount of the collateral of the issue and not on the entire financial assets of the parent company or sponsor (Vink & Thibeault, 2008). There are three classes of securities issued and traded, and these are assets backed securities (ABS), mortgage-backed securities (MBS) and collateralized debt obligations (CDO) (Blum & Dingell, 1997). As there are several kinds of securities, the primary focus of this section is the securities issues backed by mortgages – MBS. Understanding MBS is essential because it represents the largest portion of securitization in the United States (Nomura, 2006). In addition, apprehending MBS enables one to know the other forms of securitisation, as MBS is the “original source of securitisation technology”(Nomura, 2006, p. 2). In this regard, as the aim of the research is to gain a deeper understanding of MBS and to know the correlation between MBS and Subprime crisis, this segment of the research will be divided into four sections. The first part will deal with the concept of MBS. This includes the elucidation of the structures, benefits and risks attributed to MBS. The second section will be delving on the credit rating analysis of MBS while the third part will deal with the development of MBS in the United States and its primordial role in the subprime crisis. Finally, the fourth section will be the summary. Mortgage-Backed Securities Mortgages are loans issued against real estate (Hu, 2001). This serves as the backbone of MBS (Stein, Belikoff, Levin & Tian, 2010). As such, a brief discussion of mortgage loans is provided, since, it serves as the condition with which MBS works or thrives. Mortgage loans in the United States are normally fixed in 30-year payment plan. This means that 360 equal payments are to be made by the borrower within that payment scheme. It is assumed in fixed payment that after the 30 –year period both the principal and the interests are paid (Stein et al., 2010). An important facet of mortgage loan is the borrower’s right to prepay his loan. This means that when the interest rates fall, the borrower can have the option of refinancing his loan at a lower rate. While, when the interest rates increase, the borrower can locked-in at a lower rate. Although the fixed-rate mortgage loan is most common mortgage loan, there is also the adjustable-rate mortgage loan (ARM) and the hybrid. ARM offers borrowers the chance to choose a loan that has an adjustable interest rate. The adjustable interests rate can be annually or semi-annually and it is determined by published market index like yields on US Treasury securities. In order to encourage borrowers, some lenders use ‘teaser rates’. Teaser rates are low initial rates, which last until the first adjustments (Nomura, 2006). On the other hand, the hybrid is the combination of fixed rate and ARM. The scheme provides for fixed interests rate for a first several years and then it is converted into semi-annual or annual adjustable rate. Several plans have been offered under the hybrid. There is ‘5/1’, ‘7/1’ and the ‘10/1’ hybrids. However, regardless whether it is ARM or hybrid, what is significant is that, just like fixed rate loan , these types of mortgage loans allows or provides the opportunity to the borrower the prepay the loan when the conditions are favourable to the borrower. In this sense, there are two important elements in mortgage loans. First, is the certainty of the borrower’s obligation to make 360 monthly equal payments for a period of 30-years and second is the borrower’s right to prepay the loan when conditions are favourable, which means that borrowers can prepay their mortgage balance in full or in part anytime (Gangwani, 1998) Mortgage Backed Securities: In focus MBS are asset –backed securities having cash flows backed by principal and interests payments of a pool of mortgage loans (Bondi, 2009, p 253). The most common type of MBS is the ‘pass-through’ security. It represents ownership of a pool of mortgage loans (Nomura, 2006; Raymond, 2011). In this scheme, the investor receives the payment for the interests and the principal including prepayments (Nomura, 2006). For this reason, it is called ‘pass-through’ - from the homeowners to the investors. However, a small portion of the payment is not pass-through, this is servicing fee. A company, normally, acts as the servicer. It functions as the conduit between the borrower and the investor. It collects the payments from the borrower and then, it performs all the administrative functions as it aggregates the collected funds and distributes it to the investors (Nomura, 2006; Gangwani, 1998; gabaix et al, 1992). Generally, the originator is also the servicer. Moreover, pass through securities are amortised over the life of the security. This means that he principal is paid over a period of time and is not received by the investor in lump sum at the end of the period. As such, it is considered as a self-liquidating that matures at the time when the investor receives the full payment for the principal. However, due to prepayment option, the investor is uncertain as to when the principal will be returned. In this scenario, prepayment plays an integral role regarding the entire financial transaction that is transpiring. This is claimed base on the supposition that an early return of the principal, due to prepayment, reduces the investor’s share in the mortgage pool. This, likewise, affects the cash flow as the interest is now earned on the reduced existing principal. Nonetheless, in ‘pass-through’ securities, the following government agencies, namely, Ginnie Mae, Fannie Mae and Freddie Mac, guarantees the MBS issued. This guarantee is essential as it insulates MBS investors from credit risks. Ginnie Mae guarantees are backed by US government. This is because Ginnie Mae fulfils the US housing program of servicing and targeting the low and middle-income borrowers. Ginnie Mae MBS is considered as the safest in the market. Since, ‘in full trust and faith’, the U.S. Government guarantees the MBS. Although Ginnie Mae does not issue MBS, but it guarantees the MBS issued by banks, thrift and mortgage bankers that are part of the Ginny’s program. Fannie Mae and Freddie Mac, although not guaranteed by the federal government, issues MBS and guarantees through their own structure, the MBS. Since, they are not guaranteed by the federal government, Fannie Mae and Freddie Mac, they are considered only as second only to Ginnie Mae in terms of most favourable risk weight category. The second type of MBS, and teh more complicated one, is known as the ‘collateralised mortgage obligation’ (CMO). A CMO is consists of several tiers or “tranches’ (the French term for slices), each with different dates of maturity and each carrying in various degree the prepayment risk. All tranches receive interest payments. However, the topmost tier is given priority in terms of principal payment, then it is followed by the second tier and then, finally, by the last tier. No principal payment is made on other tiers, until the principal is paid in full on a class that has an earlier maturity, normally, the upper tranches have shorter and more certain maturities and, therefore, has a lower risk of prepayment. The buyers of this kind of tranches are generally insurance companies, pension funds and other investors that require relative minimal risks. The lower tranches have longer maturities and as such have a higher prepayment risk. These tranches are also called as ‘toxic waste’. They are volatile and are difficult to price (Gabaix et al., 1992). Due to this, generally, its buyers are sophisticated investors who are familiar with prepayment risks and are aware of its movements and repercussions. Under CMO, as noted, the interests of each class are paid. However, in terms of principal repayment, those principal, which are actually receiving payment, are called as ‘active or currently paying class’. Meanwhile, those principal of which payment are to occur or are expected or scheduled are categorised as falling within the window stage. Finally, those principal, which neither are receiving any payments nor scheduled to be repaid, are in the ‘locked out period’. During this stage, the investor is receiving only interest payments. CMO have several types. These are the sequential type/ plain vanilla, planned amortisation class (PAC), targeted amortisation class (TAC) and support/companion class. In plain vanilla, as the interest is paid, the principal is paid in predetermined schedule. However, principals are paid one class at a time. Only after the principal of the first class is fully paid, then the second class is paid, so on and so forth. Under this type of structure, prepayment variability is minimised and the specific requirements of the issuer are meet. On the other hand, planned amortisation class (PAC), offers a fixed principal repayment schedule. When prepayment is made and there is an irregular cash flow, the cash is redirected to the support/companion class. In this case, two classes are paid – PAC and Support class. Targeted amortisation class (TAC) offers payment stability at one prepayment speed. The degree of payment certainty that experienced in TAC depends on the CMO structure and the presence of PAC class. If the CMO structure has both TAC and PAC, then TAC investors will received higher yield. Meanwhile, support class is present if TAC and/or PAC is/are both present in the CMO structure. Companion class seeks to stabilise the payment of principal to TAC and /or PAC. There are other and more complexes CMO. Nonetheless, what is essential in the presentation is the supposition that each CMO may work independently or in combination with other types of CMO. Another important facet of MBS is its structure. MBS’ Structure There are three common structures of MBS. These are the shifting interest structure, monolined insurance structure and the senior subordinate OC. The shifting interest structure works on the view that the subordinate share of the principal is allocated to the senior class (Gangwani, 1998). The distinction between senior class and subordinate class has been made during the 1980s. The idea of Sr-subordinate is tied-up with the credit rating that securities agencies give to the pool of mortgage loans. The grade rating is ‘AAA’, ‘AA’ and ‘A’. The “AAA” is enhanced credit rating from ‘AA’ and this rating indicates that investor will receive timely payments for the interests and principal. The ‘AA’ is enhanced from ‘A’. ‘AA’ and ‘A’ are considered as subordinate classes and are also called as the ‘first-loss’ piece. This means that, at the moment of default/loss, the subordinate class will absorb it. Thus, it will not affect the rating of the senior class. Looking at it from this perspective, shifting interest structure entails that losses are absorb by the subordinate class. In fact, the term is a misnomer because the shifting is not only performed on the interest. it is done on both the interest and the principal. In this way, the ‘AAA’ rating of the senior class of the pool of mortgage loans is maintained. In effect, the credit support given to the senior class comes into three forms and these are 1. Each period the senior class is given priority in principal and interest payments. 2. Principal prepayments are allocated disproportionately to favour the senior and 3. Losses in foreclosures are first borne by the subordinate class (Gangwani, 1998, p. 33). As such, the issuer maximises both the senior class and the subordinate class without affecting the standing of the senior class. The second MBS structure is monolined insurance structure. This structure was adopted during the late 1990s. The Municipal Bond Insurance Corporation (“MBIA”), Financial Security Assurance (“FSA”), Financial Guaranty Insurance Corporation (“FGIC”) and Ambac Assurance Corporation (“AMBAC”) are the monocline companies that could guarantee timely payments of the interest and principals for a certain class of bonds (Gangwani, 1998, p. 35). In this regard, the ‘AAA’ rating was anchored on the ability of the monoline companies to pay. Monoline insurance companies charge a fee. The fee is dependent on the quality and type of the collateral. (Gangwani, 1998). The fee can range from 8 basis points (8bps) to 50 bps. In this way, the monoline structure enhances the security credit by the excess cash flow in the transactions and then by the insuring entity. The cash flow is derived from the excess spread between the weighted averaged coupon (WAC) on the collateral and WAC on the bonds. For example, WAC on the collateral is 12% while the WAC on the bonds is 7%. The difference between the two is 5% is the excess spread or the net interest margin. The excess spread creates an overcollateralization (OC) by paying down more on the principal of the bonds than is actually received on the collateral (Gangwani, 1998). The excess cash flow can be (a) used to cover any losses on the underlying collateral, (b) used to pay down the bonds faster than the collateral or (c) released to the issuer in the form of residual cash flow (Gangwani, 1998, p. 35). The third MBS structure is the senior-subordinate OC. The senior-subordinate OC is similar with the monocline insured structure. The difference between the two is the practise that it is multi-tranched and that the senior class are given the priority. In this structure, the senior class is given the priority in terms of payment for both the interest and principal. Likewise, excess cash flow is directed towards the senior class or until the period where the targeted subordination is maintained. Considering the intricateness of the process, investors and players are not dissuaded to use MBS, regardless of its type and structure because of the benefits that can be gained. The Benefits The importance of benefits cannot be downplayed as it serves as one of the driving force for the adoption of MBS. One of the several benefits that can be derived from MBS is the fact that the structure allows for corporations the liquidity of their balance sheet assets (Duffe & De Marzo, 1999; James, 2011; Sabarwal, 2006). It increases the revenue without additional balance sheet financing (Sabarwal, 2006). This is possible because the moment that the loan is sold to special purpose entities (SPE), the loans are removed from the balance sheet and the proceeds of teh sale can be used to issue new loans. At the same time, the originator continues to gain income out from the old loan due to servicing fees. Likewise, MBS offers attractive yields and monthly income (Raymond, 2011). MBS offer higher yields compared with unsecured securities. Interest rates are paid monthly based on the outstanding value of the principal and for investors with flexible time horizon, this is opportunity for good returns (James, 2011). It is also acknowledged that through MBS, small and weak corporations have been given accessed to capital funds that would have otherwise required higher ratings (Sabarwal, 2006; Stone & Zissu, 2000; Thomas, 2001). Furthermore, through MBS, the goal of providing housing for the majority of the Americans has been attained. As of 2009, 67% of Americans own their houses. Moreover, through this scheme, credit quality is maintained. GSE –issued securities are backed by financial assets such as family mortgages, multi-family mortgages and corporate mortgages and these are designed to generate cash flow. The assurance of payment is made by the issuer. In fact, Ginnie Mae is backed by the federal government and some homeowners are required to carry mortgage insurance in case the mortgage loan exceeds 80% of the home value. These benefits encourage investors to purchase new-issue MBS or participate in the secondary market where existing securities are traded among investors through dealers and brokers. However, aside from benefits, there are also known risks associated with MBS. The Risks The most important risk that MBS faces is the prepayment risk. Prepayment is the risk that homeowners may prepay their mortgage loan at an earlier time. Homeowners can do this by increasing their monthly pay, refinancing their loans or selling their property. As noted, prepayment is an option that is provided to the borrower/homeowner and it is normally undertaken by the homeowner when conditions are favourable like when interest rates are in decline or when there are changes in the personal undertakings of the borrower. Prepayments are risks first because there is no exact knowledge as to when and how the borrower will use it. It is considered as erratic and jumpy, of which the investor has no control (Nomura, 2006) Second, when prepayment is made, the investor is forced to reinvest at a prevailing lower yields. In short, the investor is not able to optimise gains from the investment and may even incur loss due to lower rates. Another risk is the extension risk. This happens when the borrower does not pay off the loan as soon as expected. This results into lower PSA and the extension of the average life. If this happens, the investor may be holding bonds with longer maturities and the yield may or may not keep up with the inflation rate or the market interest rates. Interest rate risk is also one of the risks face by MBS. In this risk, the movements in interest rates affect MBS and as such, an increase or decrease in the interest rates has a trickle effect on MBS prices. Although not a risk, an important consideration is given to the supposition that MBS is self- liquidating investment. This implies that in MBS, at the maturity of the loan, the investor will get a lump sum of the principal since both are paid on an amortised monthly schedule. As such, it is advised that careful consideration should be given in case the investor wants or chooses to accumulate the principal over the life of the bond. In addition, interests payment is fully taxed and it is complex, thus, it is recommended that accountants should be consulted pertinent to issue of taxation of MBS. MBS is an innovative response to economic downturns. This has been proven during the Great Depression of the late 1920s. Furthermore, it is a recognised instrument that can provide not only economic impetus, but also an opportunity for the government to open the venue for possible homeowners to actualise their dream of owning their houses. However, as MBS have proven to effective and advantageous on some aspects, there are also identified inherent risks to the structure and the most significant of which is the prepayment risk. In this condition, as MBS continue to contribute to market expansion, sufficient care and diligence should be practise to avoid prepayment risk and other unfavourable conditions. The Agency Credit Analysis Credit rating agencies act as the caretaker of the financial markets. The analysis that they provide makes or break a security, a company even a nation. Their analysis of the market has become the buttress of the market economy and heavily relied upon by investors because of the accuracy, objectivity, and reliability of their analysis (Portner, 2005). The ratings that they provide serve as the guide indicating the degree of risk of default of payment. In this way, the investors get an idea of the risk couched on ‘when will the investor be paid’. Thus, giving investors sufficient time to decide whether to hold or sell their security base on the accurate analysis of the rating agencies and the investors’ risk taking capacity. In other words, the investor can compare the ratings given by the credit rating agencies vis-a-vis the risk that they are willing to take. Furthermore, the need for credit rating agencies have been amplified by the complexities of the entire security, investors do not have the sufficient time to conduct their own review. As such, they have grown to rely on the accurate ratings of the crediting rating agencies (Subprime Blame, 2007). Credit rating agencies had part of the market since the late 19th century. During 1890s, the Poor’s publishing, the predecessor of S&P, was publishing the analysis of the bonds of mostly railroads. The detailed analysis and financial reviews had long been started, but it was John Moody who first thought of the idea that investors should pay for their services. What he did was he collected the information and packaged it in a way that the investors could use it. By 1909, John Moody published his first rating report (Partnoy, 2005, p. 6). This is now currently known as Moody’s Investor Services. The three primary rating agencies that assign ratings are Fitch Ratings (“Fitch”), Moody’s Investors’ Service (“Moody’s”), and Standard & Poor’s (“S&P”). These agencies evaluate the health of an entity that has the legal authority to issue securities, determine its creditworthiness and the probability that the security its issues will suffer default. The credit rating agencies provide the investors the necessary tool that they can use as they evaluate whether or not the security meets their level of safety or risk tolerance when considering purchasing it for inclusion in their financial portfolio. Before, during the late 19th century, it was the investors who requested and paid for the ratings. However, when the Great Depression happened with the 1929 Stock Market Crash , investors lost confidence on the agencies and “the rating business remained stagnant for decades” (Partnoy, 2005, pg. 6). Currently, issuers purchase 90% of the ratings. Credit Analysis Credit analysis is the process adopted by credit rating agencies to assign credit rating that signifies whether there is an increase or decrease probability of default or will the issuer will meet its obligation. It provides a solid background with which the investors can know will they be paid in timely manner. In effect, the rating is an indicator of credit risk. The moment an initial rating is issued, changes in the risk of default can result in upgrades or downgrades of credit ratings. Credit ratings remain one of the most important indicators of financial performance readily available to the investment community. The broad long-term obligation credit rating categories are triple-A (“Aaa” or “AAA”) for the being the best possible rating and “D” for default being the worst. Credit ratings considered to be “investment grade” are those in the “Baa/BBB“ category or higher, with rating categories then ascending from “A/A” to “Aa/AA” to “Aaa/AAA” (Johnson, 2008). These rating categories are often specified up or down through the use of modifiers - Moody’s assigns modifiers of “1”, “2” or “3” while S&P employs “+” or “-”signs. For example, a Moody’s rating of “Aa1” is considered superior to a rating of “Aa3”, while an “AA+” rating from S&P is of higher credit quality than an “AA-” rating. Table 1 Rating Agencies Moodys S&P Fitch Value 1 Aaa AAA AAA 2 Aa1 AA+ AA+ 3 Aa2 AA AA 4 Aa3 AA- AA- 5 A1 A+ A+ 6 A2 A A 7 A3 A- A- 8 Baa1 BBB+ BBB+ 9 Baa2 BBB BBB 10 Baa3 BBB- BBB- 11 Ba1 BB+ BB+ 12 Ba2 BB BB 13 Ba3 BB- BB- 14 B1 B+ B+ 15 B2 B B 16 B3 B- B- 17 Caaa1 CCC+ CCC+ 18 Caaa2 CCC+ CCC+ 19 Caaa3 CCC- CCC- 20 - CC CC 21 - D D Source: Vink & Thibeault, 2008 MBS in the United States Although the economic crunch resulting from the subprime crisis is multifaceted of which MBS is included, the notion of MBS is not something new. In fact, its origin can be traced from the first Great Depression of the 20th century. During the 1920’s until the late 1930’s, the housing market was still dependent on the savings of the borrower. This meant that banks would issue the loans depending on whether the borrower had sufficient funds to cover for the loan. However, since the banks were the originators of the loan, they would also carry the burden of the credit risk and fluctuations. In order to spur the economy (Taylor, 2009), the government established the Federal National Mortgage Association (also known as Fannie Mae) in 1938. As a government owned corporation, its primary mission was to create a secondary market for mortgages. Fannie Mae bought the mortgages from the originators, thus, bringing back the cash proceeds to the institutions and at the same time holding the bought mortgages in their portfolio. In this way, Fannie Mae shouldered the credit risk, liquidity risk and market risk. This posed no threat to Fannie Mae since it had a diversified portfolio and was not encumbered by regulatory limits imposed on banking institutions (Lowenstein, 2008). Nonetheless, it should be noted that Fannie Mae would only buy mortgage loans that conform to their underwriting standards. Until now, the lending standards used by Fannie Mae to define ‘conforming loans’ are deemed synonymous with ‘prime mortgages (Dodd, 2007). By World War II, war veterans were also provided incentives wherein they were promised to be given lower interests rates if they would procure a mortgage loan upon returning home. This incentive created a wider a base for the housing market. Nonetheless, Fannie Mae, together with the war veterans’ incentive, was proven very efficient in stimulating the housing market that the government in 1960 created the Government National Mortgage Association (also called as Ginnie Mae). Ginnie Mae handled the government-guaranteed mortgage loans from the veterans and other federal housing loans while Fannie Mae was privatised. This moved was initiated in order to re-organise Fannie Mae and to remove the activities of Fannie Mae form government budget. However, despite the privatisation of Fannie Mae, Fannie Mae together with Ginnie Mae continued to provide funding for low-income housing program. By 1970, Ginnie Mae developed the mortgage-backed securities. This was intended to transfer the market risks to investors and removed from the budget much of the loan incurred to finance government-housing projects. The project worked by pooling similar mortgage loans and selling securities that had claims on the mortgage payments from the pool. In this way, the payments were directly passed to the security holders. It was also during the 1970s that the Federal National Mortgage association (also known as Freddie Mac). Freddie Mac was established in order to provide competition to Fannie Mae and conventionalised the mortgage securities. By opening the mortgage securities to wealthy individuals and other institutions, the market risk is spread, the depository institutions are given more liquid assets and it provided a deeper source of financing that could be tapped for the housing market. Moreover, the securitisation of the mortgage loans has allowed for the removal of liquidity risk of mortgage loans in the balance sheets of financial institutions. In this regard, the market risks as a well as the liquidity risks are, technically shouldered, by both Fannie Mae and Freddie Mac as it has the capacity to bear these kinds of risks due to its diversified portfolio (Sabarwal, 2006; White 2008). Furthermore, securitisation allows the originators to earn from the servicing of the loan. This is important as it enables institutions to process the loans, gains some fees out of servicing g without incurring any risks. In other words, it is pure revenue. On the other hand, the originators can also buy the securities of the mortgage loans and through this, they gain more liquid assets. Moreover, aside from earning from the servicing fees, they can also earn out from the interest. This market structure has gained success and attracted private investors and other financial institutions. The entrance of private investors and other financial institutions in the market has opened the room for the shift of market share to transpire. Following the serious errors of Fannie Mae and Freddie Mac, which have resulted in compliance issues with the new accounting rules of derivatives, Wall Street major firms have launched an aggressive move in the issuance of MBS. In 2003, the government-sponsored enterprises held 76% of the MBS and ABS while the private label issues were only 24%. However, by mid 2006, the share of government-sponsored enterprises had fallen to 43 percent while the private label issues had increased to 57 percent. Among the large private label issuers were well-known firms—such as Wells Fargo, Lehman Brothers, Bear Stearns, JPMorgan, Goldman Sachs, and Bank of America—as well as several major lenders to high-risk subprime borrowers, such as Indymac, WAMU, and Countrywide (Dodd, 2007). Along with this radical shift in the market share, came a new standard to underwriting standards (Dodd, 2007). While Fannie Mae and Freddie Mac were only mostly ‘prime’ mortgage lenders, the private label share grew in large part through the origination and securitization of high-risk subprime mortgages as well as "Alt-A" mortgages, which were made to borrowers who were more creditworthy than subprime customers but presented more risks than prime borrowers (Dodd, 2007, np) MBS and The Subprime Crisis The global financial crisis is multifactorial (Shutt, 2002; Wellink, 2009). Some blame it on greed (Dell’Araccia et al., 2008; Hope, 2009, Griffith- Jones, 2009;Jensen & Murphy, 2009), others on the change nature of banks (Demanyanyk & Hasan,2009; Timber, 2007; Suder, 2009) while others blame it on deregulation (White, 2008). Although all these factors contribute in one way or another to the global economic crisis, the U.S. subprime crisis is the proximate cause that precipitated the global financial meltdown (Bernanke, 2009). What happened was the adoption of certain poor public policies, which in turn distorted interest rates and asset prices, diverted loanable funds into wrong investments and pushed the robust financial market in unsustainable position (Bernanke, 2009). ‘Creative lenders and originators’ has created a scheme wherein the borrowers did not have the sufficient income relative to their loans (Bernanke, 2009;Brunnermier, 2009; Lowenstein, 2008). Many of them thought of plans that would allow them to sell their property at higher prices that would help them with the monthly payments or throught of borrowing against a higher value of their property started to default (Bernanke, 2009; Chomsisengphet & Pennington-Cross, 2006). In this scenario, limited cash flow happened and the result is the spiral of events that have resulted into the global financial meltdown of the 21st century. The innovation that had happened was the hyperexpansion of the mortgage market, which accommodated borrowers who did not provide sufficient evidences that they could afford the monthly payments of the loan. The reliance was removed from the capacity of the borrower to pay and was transferred to the trust given to MBS, and the credit ratings. This trust was implicit on the supposition that, in the long run, MBS is backed by the federal government and if default would ensued, the investors would be bailed out (White, 2008). Furthermore, it has been observed that disclosure of the necessary information was opaque (Schwarz 2008a/2008b). Schwarz (2008a/2008b) the problem of disclosure is not only because of the complexity of the issue, but also because of the fact that players of the mortgage market are covering and protecting their own interests and they are no longer looking in securing the entire system. In the end, the correlation between MBS and the subprime crisis is just the icing of the cake. It is a whole gamut of poor policies, (dubious?) ratings, changes, de-regulations, greed and options that have combined and have created the bubble (Lowenstein, 2008; White, 2009). It is not something that just can be blamed on the borrowers acting irrationally. Summary MBS as a scheme has paved for turning into reality the dreams of many to acquire their own houses. 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