Mortgage Backed Securities and Collateralized Mortgage Obligations FRBSF Community Investments (pdf, 81 kb)
Andrew Kelman, Friedman, Billings, Ramsey & Co.
Fannie Mae CRA-Targeted MBS (pdf, 13 kb)
Mary Beth Preuss, Fannie Mae
Mortgage originators can either (1) hold a new mortgage in their portfolio, (2) sell the mortgage to an investor or conduit or (3) use the mortgage as collateral for the issuance of a security. An MBS is a pool of mortgages that represent the collateral for a security. The cash flow pattern associated with an MBS is based on the payment of the individual mortgage loans underlying the security. The ability of borrowers/homeowners to prepay part or all of the mortgage at any time creates uncertainty regarding cash flow (above and beyond possible delinquencies), so investors usually wish to be compensated for accepting the risk of unscheduled payments. A targeted MBS is a security collateralized by a pool of mortgages originated to borrowers/homeowners whose incomes are 80 percent or below of area median income.
CMOs are more complex mortgage securities that help compartmentalize prepayment risk and better addresses investment time frames and cash-flow needs.