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Mortgage-Backed Securities and Derivatives Trading Essay


Introduction

The dynamic development of the mortgage market is the phenomenon that is relevant today due to the great opportunities that this type of public installment offers. The possibility to purchase property is a complex and sometimes unbearable task for many people. Mortgage lending allows buying real estate with payment by installments, which is convenient for many residents. Nevertheless, the management of mortgage securities is not always a simple process for the banking sector since the conventions that this procedure contains are sometimes difficult to control. As a result, problems arise that affect both lenders and borrowers. Parallel to these processes, derivatives trading that is also related to the banking sector is an acute issue for modern market participants. The solution to pressing problems and the competent control of available resources are effective and in-demand mechanisms for the reasonable management of these financial spheres.

Problems and Regulation of Mortgage-Backed Securities

Mortgage-backed securities are necessary primary creditors (for instance, banks that issue loans) and issuing organizations (specialized authorized organizations that will deal with the task of mortgage securities). The main characteristics of securities are their rights and the requirements of mortgage loans. Due to their reliability, they allow attracting cheap and, last but not least, long-term financial resources to the mortgage market. As Lane notes, “according to Freddie Mac’s latest report, the 30-year fixed-rate mortgage increased to 4.19% for the week ending Jan. 26, 2017, up from 4.09% in the previous week.” Therefore, increasing rates is a logical process that is caused by the interest of both borrowers and creditors in the opportunities provided by such securities.

Banking prospects are favorable for introducing new credit conditions and providing customers with installment services for real estate. Nevertheless, as Mishkin remarks, monetary policy is coordinated by current market needs, and in case of a decline in consumers’ interest, rates will change (412). According to Lane, “for example, if the market interest rate is 4.19%, as it is now, a borrower with an interest rate of 3.75% has no incentive to refinance.” At the same time, “as refinances drop, so do prepayments” (Lane). Even in the case of natural and stable growth in rates, constant monitoring by stakeholders is an indispensable measure since any, even the slightest changes in the dynamics of interest can affect financial outcomes adversely. Therefore, the regulation of mortgage-backed securities is an essential and urgent task.

Problems and Regulation of Derivatives Trading

The need to regulate derivatives trading is because this segment of the stock market is the source of danger in regarding the risk of defaults of individual bidders and the system as a whole. Exchange derivatives allow increasing the size of the financial lever. For example, according to Mishkin, in the US, the exchange market for credit derivatives is regulated by the Securities Commission and the Futures Trading Commission, while the OTC market is conditionally regulated by the participants themselves who have the right to establish self-regulating organizations (69). The latter, as a rule, delegate their functions back to investment banks, which leads to natural abuses in the risk management policies based on their desire to obtain additional speculative income.

In the market, the predominance of credit derivatives or hedge funds is characterized by the fact that their activities are not managed by national regulators. The fundamental problem is the unwillingness of market participants to move to regulate credit derivatives by state and supranational boards to preserve superprofits in the growing phase of the economic cycle by disorienting investors with pseudo-high ratings and the indicators of financial stability. According to McDowell, “the number of firms actively offering derivatives clearing services globally has dramatically reduced since the 2008 financial crisis, with costs of capital and regulatory burdens forcing many to shut down operations.”

One of the rules that almost all participants of the credit derivatives market took out for themselves from the crisis is that greater transparency is required. As Flitter remarks, credit default swaps and other over-the-counter derivatives are bilateral contracts concluded by private entities. Their content is known, as a rule, only to relevant contracting parties. Conducted in the US, this legislative activity promotes a better understanding of the credit derivatives market and opens up new opportunities for eliminating existing problems. Stakeholders work on this issue in close cooperation with lawmakers. In the course of such interaction, the market is transformed from decentralized into a more centralized structure.

Conclusion

A competent solution to the current problems associated with mortgage-backed securities and the regulation of issues in the field of derivatives trading is a prerequisite for the modern financial sector, and relevant mechanisms are in demand. Regardless of the situation in the market, constant monitoring of consumers’ interest is essential for conducting the competent policy of controlling interest rates. The cooperation of stakeholders in those issues that are related to derivatives trading contributes to avoiding the negative consequences of the crisis and managing all the available resources effectively.

Works Cited

Flitter, Emily. The New York Times, 2018, Web.

Lane, Ben. Housingwire. 2017, Web.

McDowell, Hayley. The Trade. 2018, Web.

Mishkin, Frederic S. The Economics of Money, Banking, and Financial Markets. 11th ed., Pearson Education, 2015.

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IvyPanda. (2020, November 25). Mortgage-Backed Securities and Derivatives Trading. Retrieved from https://ivypanda.com/essays/mortgage-backed-securities-and-derivatives-trading/

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"Mortgage-Backed Securities and Derivatives Trading." IvyPanda, 25 Nov. 2020, ivypanda.com/essays/mortgage-backed-securities-and-derivatives-trading/.

1. IvyPanda. "Mortgage-Backed Securities and Derivatives Trading." November 25, 2020. https://ivypanda.com/essays/mortgage-backed-securities-and-derivatives-trading/.


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IvyPanda. "Mortgage-Backed Securities and Derivatives Trading." November 25, 2020. https://ivypanda.com/essays/mortgage-backed-securities-and-derivatives-trading/.

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IvyPanda. 2020. "Mortgage-Backed Securities and Derivatives Trading." November 25, 2020. https://ivypanda.com/essays/mortgage-backed-securities-and-derivatives-trading/.

References

IvyPanda. (2020) 'Mortgage-Backed Securities and Derivatives Trading'. 25 November.

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