Suppose you are asked to testify in congress regarding the desirability of Mortgage Backed Securities and how these products should be regulated.
a. First, explain what a MBS is. Draw the balance sheet of a MBS. Explain what is meant by “tranching”.
b. What are the benefits of MBS if any? Or should they be banned entirely?
c. How do households who want to borrow to buy a house benefit from the existence of MBS?