The prices of traded mortgage backed securities have followed house prices down.

That left the financial institutions that held mortgage backed securities in much weaker condition, and several failed.

In 2007 2008, this was the case for a class of securities based on residential mortgages in the United States (RMBS, or residential mortgage backed securities).

As a result, mortgage brokers maximize their income by generating larger volumes of mortgages, as do the banks that package these loans into mortgage backed securities (MBS s).

It may make sense for central banks (or Fannie Mae, America s major government sponsored mortgage company) to buy mortgage backed securities in order to help provide market liquidity.

The mortgage backed securities that US banks succeeded in selling to the world are not comparable to European assets with similar names.

Asymmetric information between sellers and buyers of financial products can easily leave buyers vulnerable to abuse, as we saw with mortgage backed securities.

It involved a complex synthetic security that was derived from existing mortgage backed securities by cloning them into imaginary units that mimicked the originals.

Even mortgage backed securities, which were at the center of the financial crisis that erupted in 2008, have important uses in spreading home and auto ownership.

India s banks and financial institutions were not tempted to buy mortgage backed securities and engage in the fancy derivatives trading that ruined several Western financial institutions.

Banks naturally avoided traditional business loans (which would have to be backed by more capital), and instead loaded up on the highest yielding and thus riskiest AA or AAA mortgage backed securities that they could find.

The Fed bought more than 2 trillion of Treasury bonds and mortgage backed securities, nearly ten times the annual rate of bond purchases during the previous decade.

Consider the following. The financial crisis erupted in 2008 when mortgage backed securities were revalued at much less than what they had been thought to be worth.

The Fed is buying Treasury bonds and long term mortgage backed securities at a rate of 85 billion a month, equivalent to an annual rate of 1,020 billion.

In the current crisis, even the private rating agencies dramatically underestimated the risks involved, which helped lure international financial investors into purchasing mortgage backed securities at exaggerated prices.

When the Fed buys Treasury bonds or other assets like mortgage backed securities, it creates reserves for the commercial banks, which the banks deposit at the Fed itself.

The main problem is that the flow of foreign credit has been impaired because US mortgage backed securities and the derivatives based on them have become nearly unsellable everywhere.

In the US, the low risk assigned to senior tranches of mortgage backed securities made them attractive instruments for banks to hold, given the relatively high return they offered.

The crisis spread because the banking system was not sufficiently risk averse and in some cases even seemed to relish risk. Mortgage banks kept some claims on their books, but sold most of them to investment banks as mortgage backed securities.

We then call on credit rating agencies to certify that the less risky of these mortgage backed securities are safe enough for pension funds and insurance companies to invest in.

Some distressed banks clearly possess large quantities of mortgage backed securities, and are holding onto them in the hope that their prices will rise in the future, saving them from failure.

The rating agencies miscalculated the value of asset backed securities.

Declining house prices are key to the financial crisis and the outlook for the economy, because mortgage backed securities, and the derivatives based on them, are the primary assets that are weakening financial institutions.

And, if the downward spiral in house prices continues, the value of mortgage backed securities held by financial institutions around the world will continue to decline, affecting the supply of credit far beyond the US.

But leading banks are also accused of illegal behavior inducing people to borrow, for example, by deceiving them about the interest rate that would actually be paid, while misrepresenting the resulting mortgage backed securities to investors.

For example, under the internationally agreed Basel Committee rules that were in place before the 2008 crash, capital requirements for business loans were five times higher than for mortgage backed securities that had AA or AAA ratings.

In the US, the Term Asset Backed Securities Loan Facility (TALF) program and the Public Private Investment Program (PPIP) were in effect debt forgiveness schemes aimed at sub prime mortgage holders, but on too small a scale.

This synthetic collateralized debt obligation (CDO) did not finance the ownership of any additional homes or allocate capital more efficiently it merely swelled the volume of mortgage backed securities that lost value when the housing bubble burst.

Indeed, with its recent decision to pursue QE3, the Fed is focusing once again on the mortgage backed securities market but, given that the market is much healthier now, it is unclear how much good this will do.

And the market is prone to temporary fits of shared enthusiasm for emerging market debt, for Internet stocks, for residential mortgage backed securities, for Greek government debt. Traders need not wait to see when or whether the profits materialize.

America exported its toxic mortgages around the world, in the form of asset backed securities.

For years, hundreds of billions of new mortgage backed securities (MBSs) and collateralized debt obligations (CDOs) generated from them were sold to the world to compensate for the lack of savings in the United States and to finance American housing investment.

This could happen for two reasons. First, investors, recognizing that the dollar is overvalued and that they are likely to suffer large losses when it returns to its fundamental value, could start selling their Treasury bonds, corporate bonds, and mortgage backed securities.

Not only has the bank just reported its first quarterly loss in more than a decade it has also agreed to a tentative deal to pay a fine of 13 billion to the US government as punishment for mis selling mortgage backed securities.

Even mortgage backed securities, which were at the center of the financial crisis that erupted in 2008, have important uses in spreading home and auto ownership. The problem was not with the innovation, but with how it was used that is, with financiers incentives.

Banks everywhere are learning the hard way that the debt with which the US financed its consumption boom will not necessarily be repaid. The mortgage backed securities that US banks succeeded in selling to the world are not comparable to European assets with similar names.

True, major commercial banks, like Citibank and Bank of America, tottered, but they were not at risk because of their securities underwriting for corporate clients or their securities trading divisions, but because of how they (mis)handled mortgage securities.

The US Federal Reserve, for example, is currently purchasing assets (many of them mortgage backed) worth 85 billion each month.

In the US, this happened when investors discovered that even AAA rated asset backed securities were in reality risky.

Often, securities are created that are backed by sophisticated portfolios containing good and bad assets whose true risk cannot easily be assessed.

Its banks and financial institutions were not tempted to buy the mortgage supported securities and credit default swaps that ruined several Western financial institutions.

Even so, the explosion in the quantity of collateralized debt obligations and similar securities went far beyond what was needed to sustain mortgage lending.

That way, they would share the pain if the securities are not serviced and thus gain a powerful incentive to maintain tight mortgage lending standards.

An audit would also reveal more details about financial market interventions like those in 2008, when the Fed purchased mortgage securities from Bear Stearns and AIG.

In Europe, particularly Germany, a mortgage backed security ( Pfandbrief ) is an ultra safe asset, as normally banks finance no more than 60 of a house s value.