Mortgage Based Securities And Covid-19 Impact Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Mortgage Based Securities And Covid-19 Impact Case Solution

The US treasury market and distribution

The U.S. Treasury securities were sovereign debt instruments issued by the United States Department of Treasury and guaranteed by the United States' full faith and credit. Treasury bills, Treasury notes, Treasury bonds, and Treasury Inflation Protected Securities (“TIPS”). Treasury bonds had the greatest maturity period of 30 years and were issued semi-annually coupon payments. Treasury notes had maturities ranging from two to ten years and paid semi-annual coupons. Treasury notes, on the other hand, matured in one year or less – with the lowest term being four weeks – and were zero-coupon bonds. Finally, TIPS were government bonds whose principal was modified in accordance to the rate of inflation in the United States, shielding the investors from the changes caused by inflation. As of March 30th, 2020, the composition of outstanding U.S. government debt was predominantly comprised of 7-year Treasury notes (16.7 percent), 10-year Treasury notes (16.6 percent), and Treasury bonds (14.2 percent), with 1-year Treasury bills accounting for just 4.2 percent. (Exhibit 2)

U.S. mortgage market

In the U.S.majority of buyers do not purchase their home from their complete wealth, instead they use some part of their money as down payment and borrow the rest as bank loan. Loan to purchase home is known as mortgages. Mortgages in the U.S. means that lender could seize the assets form the borrower in case of default.

Following the 2008 financial crisis; monthly issuance of the US government securities increased to an annual total of $6.67 trillion in 2008 and to $8.83 trillion in 2009. After falling to $6.88 trillion in 2015, issuance increased rapidly and reached the new height of $10.30 trillion and $11.96 trillion in 2018 and 2019, respectively. The increase in issuance had resulted in a steep increase in the government deb-tout standing,rising from-under$3 trillion in 2000 too ver $16 trillion in 2019(Exhibit 2). Debt outstanding totaled $17.15 trillion as of March 2020, accounting for 80 percent of the US GDP (GDP). 1 Despite the rise in US government debt, Treasury rates have been continuously falling since 1980. (Exhibit 3). The 1.28 percent yield on 30-year US Treasury notes was approaching record lows as of April 23^rd, 2020. (See Exhibits 3 and 1g.)

Mortgage market in the U.S. is one of the biggest market. In 2019, there was 16.01 trillion dollars of outstanding mortgage debt, out of which, 11.06 trillion were comprised of the family residential homes. Over 2 trillion of mortgages had originated from single family homes in 2019. (Exhibit 5)

One of the key features of residential mortgage is that borrowers can repay the remaining principal amount at any time, without any extra penalty. (Exhibit 8 shows historical payment). This option is highly valued by the home buyers.

Mortgage based securities (MBS)

Secularization is a process through which MBS was formed. This process starts with individual home borrowers. It merges many mortgages and then sells them to an MBS issuer. Then it sends them to investors as pension funds and mutual funds. (Exhibit 4 shows modified duration).

In 2019, 2.1 trillion MBS were issued and the mortgage related securities exceeded 10.3 trillion in 2019. (Exhibit 10 contains historical data on mortgage origination)

Non agency MBS are also known as private label. Private label MBS held non-conforming mortgages, which included mortgages with subprime credit scores that played an important role in 2018........................

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