Question

Why were mortgage backed securities (MBS) considered toxic and What caused MBS to rapidly lose value?

Answer 1

Answer) Mortgage-backed security (MBS) is an investment similar to a bond that is made up of a bundle of home loans bought from the banks that issued them. Investors in MBS receive periodic payments similar to bond coupon payments.

Mortgage-backed security has become a toxic asset because the 2008 financial crisis have been caused by an underestimation of downside risk combined with a lack of rigor by the ratings firms.

MBS rapidly lose value because hedge funds, banks, and insurance companies caused the subprime mortgage crisis. Hedge funds and banks created mortgage-backed securities. When the Federal Reserve raised the federal funds rate, it sent adjustable mortgage interest rates skyrocketing. As a result, home prices plummeted, and borrowers defaulted.