Wall Street loves financial instruments which are too complicated for people to understand and must turn to them for their expertise. Back when I was at Arthur Andersen I was at Salomon working on pricing models for Collateralized Mortgage Obligations running as complicated models as possible for regulators to approve pricing based on repayment/prepayment scenarios.
But the simple fact is when interest rates go up, no one prepays/repays early because property values go down so they can't sell and no one refinances to get a higher rate. When interest rates go down everyone prepays/repays early because they either sell because prices go up or refinance to get a lower rate.
This became obvious when the CMO market fell apart when interest rates fell and everyone got their money back too soon and at the worse possible time because it then had to be invested at lower rates when they had been promised long term stability. So The Street changed the name, made them more complex, more risky, and they eventually became the major driver of the 2008 financial collapse. And for years the only purchaser was The Fed because no one else would touch them. It had promised an exit to this starting in 2010, but then started buying again, tried again to start exiting again in 2018, but this year began buying again at a unprecedented rate and currently holds a record amount - and is still buying.
Graph and download economic data for Assets: Securities Held Outright: Mortgage-Backed Securities: Week Average (WMBSEC) from 2002-12-18 to 2023-03-08 about outright, mortgage-backed, credits, reserves, securities, banks, depository institutions, and USA.
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