Roughly 84 million single-family homes sit in America, and most owners do not know who holds their debt, because mortgages are pooled into a $12 trillion mortgage-backed securities market. The idea of packaging property debt for distant investors dates to 18th century bonds backed by plantation mortgages that used enslaved people as collateral, then to 1850s farm railroad mortgage bonds that fed the Panic of 1857. A modern MBS works through a bankruptcy-remote special purpose vehicle that buys loans, pools them and issues pass-through securities sliced into tranches by repayment priority. Investors track a factor showing how much principal remains, along with weighted average maturity and weighted average coupon.

The government system grew from the 1934 Federal Housing Administration, which standardized the long-term fixed-rate mortgage, and Fannie Mae in 1938. Ginnie Mae, split off in 1968, guaranteed the first mortgage pass-through security. In the 1970s baby boomers, double-digit inflation and a 5.75% cap on thrift savings rates drained local lenders, and securitization tied housing to national capital markets. The 1984 Secondary Mortgage Market Enhancement Act, 1986 REMIC rules and the 1999 Gramm-Leach-Bliley Act, which repealed Glass-Steagall, opened the way to originate-to-distribute lending, subprime pools repackaged into AAA-rated CDOs, and the 2008 crisis.

• Prepayment risk hits investors when falling rates trigger refinancing, a pattern known as negative convexity.
• Analysts price MBS with Monte Carlo simulations that model how homeowners respond to rates and unemployment.
• Stripped securities split each payment into interest-only and principal-only bonds.
• MERS, created in the 1990s, let lenders transfer mortgages electronically without recording them at county courthouses.
• During foreclosures some judges could not determine who owned the note, and the robo-signing scandal followed.