NOTE: SBINEWS DOES NOT PERMIT CIRCULATION OF ATTACHMENTS. ATTACHMENTS, IF ANY, CIRCULATED WILL BE ONLY BECAUSE OF VIRUSES. PLEASE,THEREFORE, IGNORE ATTACHMENTS IF ANY IN SBINEWS MESSAGES ************************************************************************ What is MBS? B. Venkatesh (Hindu Businessline) THE National Housing Bank (NHB) proposes to act as a market maker for mortgage-backed securities (MBS). Now, what is MBS? These are securities created from a pool of home-loans. HDFC, for instance, could bundle home-loans that possess similar risk characteristics and maturity into securities and sell them to investors. HDFC will collect the interest and the principal on these loans from its borrowers and pass them to the investors of the MBS. A conventional MBS is, hence, also called a pass-through security. Assume HDFC pools home-loans with average maturity of 10 years with average home-loan rate of 8 per cent. It may charge 0.5 per cent as commission to collect cash flows from the home-loan borrowers. The MBS will, therefore, carry an interest rate of 7.5 per cent with an average maturity of 10 years. HDFC may also choose to get a credit guarantee for the MBS. This is referred to as credit enhancing. Suppose HDFC pays NHB 0.50 per cent for credit enhancing the MBS. This means that NHB will pay the investors of MBS, if home-loan borrowers default in the payment of interest and principal to HDFC. As credit enhancement lowers default risk, HDFC will be able to sell MBS with a lower interest rate. MBS helps a company like HDFC in converting the home-loan assets into cash. The company can use this cash to offer more home-loans and expand the business. Investors also benefit because the interest rate on MBS is higher than that on government securities. Of course, investors of MBS run a prepayment risk. This is the risk that the borrowers will prepay their home-loans. Typically, borrowers prepay when interest rates decline. In such times, the home-loan company will collect the additional principal and pass on the cash flows to the investors of the MBS. The investors will now be forced to re-invest these cash flows at a lower rate. _____________________________________________________________ Donât just e-mail them, BeaconFlash themâ *************************************************************************** Mailing list (sbinews@xxxxxxxxxxxxx) related information: News/articles about SBI and Banking related matters published in the print media, Internet etc will be circulated through this Mailing List. The messages in this list will help in improving awareness of SBI and its activities vis-a-vis the happenings in the Banking industry. This should be of help to all staff members of SBI, particularly those who are preparing for promotional written tests/interviews/group discussions. Subscription to this Mailing List is simple and FREE. Please check the procedure below. Please share this information with other colleagues/branches that could be interested in subscribing to this Mailing List. The messages circulated here should not be deemed to have the official endorsement of the SBI or any of its employees. The correct factual position may be ascertained from official sources. To join this mailing list, just send an email to sbinews-request@xxxxxxxxxxxxx with the word 'subscribe' without the quotes in the subject of the email message. To leave this mailing list, just send an email to sbinews-request@xxxxxxxxxxxxx with the word 'unsubscribe' without the quotes in the subject of the email message. Archives (old messages) are available for viewing at: //www.freelists.org/archives/sbinews Click on the month-year at the lower left corner to view messages posted during that month. This is an announcements/newsletter type mailing list i.e. only the Moderator/s can post messages to the list. This mailing list is maintained and moderated by Sri. R.S.Pai, currently working as Chief Manager(IT-Internet Banking), SBI, Corporate Centre, Mumbai. Visit http://rspai.tripod.com for some useful Banking, Reference and Utilities Links