Question

Why do you think it is difficult for investors to assess the financial condition of a financial institution that has purchased a large amount of mortgage-backed securities? Provide an example.

Answer 1

It is difficult to assess the financial condition of a financial institution when they have MBS because credit ratings agencies often give the companies higher ratings then they should have. Also the secondary market is sometimes inactive, making it harder to value the securities. Also, investors have limited transparency. They do not know how many mortgages are subprime or sound. Also the risk of mortgage-backed securities is dependent on the underlying mortgages and the details of the mortgages are not disclosed in financial statements.

For example, you need to assess the case study of some companies or their financial structure.

I hope this helps you..

all the best,,.