President Lyndon Johnson created mortgage-backed securities when he authorized the 1968 Charter Act. It also created Fannie Mae. He wanted to give banks the ability to sell off mortgages. That would free up funds to lend to more homeowners. (How Mortgage-Backed Securities Worked Until They Didn’t, KIMBERLY AMADEO Updated January 31, 2019)
Mortgage Backed Securities are investments backed by mortgages. The bank makes mortgage loans to individuals or businesses. Instead of holding these loans for 15, 20 or 30 years, they have the ability to bundle large groups of mortgages together and sell them to an Investment Bank or group of investors. This new group will then begin receiving the interest payments, along with the premium payments, from the loans and can distribute a portion of its proceeds to its investors. Since the mortgages are no longer under the bank’s asset list, the bank is then free to create more mortgage loans. This ability to continually make new loans added to the 2008 financial crisis.
Mortgage-Backed Securities are still sold today. The creditworthiness of the mortgages whining the bundled group of mortgages is very important when considering your investment dollars in these securities.