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November, No. 244

Recent media coverage on the problems in the subprime mortgage market has featured an alphabet soup of abbreviations, such as MBS, CDO, and SIV. What do these terms stand for? And how do they fit into the mortgage financing process?

Last Updated: 10/17/2007

The Role of Securitization in Mortgage Lending

Richard J. Rosen

Rosen discusses the sources of financing for mortgages. The focus is on the role of securitization in financing mortgages, which includes mortgage-backed securities (MBSs), collateralized debt obligations (CDOs) and structured investment vehicles (SIVs). The process by which most mortgage loans are sold to investors is referred to as securitization. The author first outlines the process by which a mortgage becomes part of an MBS, touching on the role of Ginnie Mae, Fannie Mae, and Freddie Mac (secondary market lenders, described in detail later). The author then explains how MBSs are repackaged into CDOs and SIVs.