Counterintuitively, rising interest rates make mortgage servicing businesses more valuable. When rates rise, homeowners with existing low-rate mortgages are less likely to refinance or move. This provides the mortgage servicer with a longer, more predictable stream of payments, increasing the value of their servicing rights.

The primary role of GSEs (Fannie Mae, Freddie Mac) is not to lend money but to act as enormous insurance companies. They publish specifications for 'conforming' mortgages and then sell insurance against the risk of non-payment, which standardizes the mortgage product for the entire downstream market.

Home ownership is reframed as a high-risk financial instrument, not a safe investment. A mortgage constitutes a 5-to-1 levered, highly concentrated, non-cash-flowing bet on the economic future of a single zip code, making it far riskier than a diversified public market portfolio.

In large loan portfolios, defaults are not evenly distributed. As seen in a student loan example, the vast majority (90%) of defaults can originate from a specific sub-segment, like for-profit schools, and occur within a predictable timeframe, such as the first 18 months.

While AI will increase prepayment risk from efficient servicers, it also presents an opportunity for investors. AI can be used to identify and bundle loans with specific desirable characteristics into new 'specified pools,' allowing for more precise risk targeting and alpha generation in the MBS market.

The administrative task of collecting mortgage payments is a separate component called a Mortgage Servicing Right (MSR). These MSRs are actively bought and sold, leading servicing to be consolidated among large, specialized firms. This is why the company you send your payment to often changes.

ARMs tempt buyers with low initial payments, but they are a gamble. You're betting that your income will rise, rates will fall, or home values will increase before your payment jumps significantly. This risk is often downplayed by lenders who are incentivized to sell loans.

The primary function of mortgage securitization is to move long-term interest rate risk off bank balance sheets. Entities like pension funds, which have long-term liabilities and are less sensitive to short-term rate hikes, are better suited to hold these assets, creating a more stable financial system.

The traditional two-tier credit market (investment grade and high-yield) has evolved. A new four-tier hierarchy of credit quality now exists: Investment Grade, High Yield, Leveraged Loans, and finally, Private Credit, which has absorbed the riskiest deals that cannot find financing in the other markets.