An Analysis of the Concept of Mortgage-Backed Securities: An Economic and Legal Perspective

Abstract

This article examines the concept of mortgage-backed securities (MBS) issued in the securitisation programs in a theoretical context. First, it outlines a general explanation of the securitisation process, focusing particularly on MBS programs, within a context of microeconomic theory. Second, the incentives for participants in the MBS programs are outlined within a contractarian framework, which includes the agency theory1, and provides a framework to analyze the incentives of the various participants at each stage of, or contract in, the overall securitisation process. Finally, suggestions are made concerning some of the key features that might characterize a theoretically optimal regulatory regime for mortgage-backed securities.