A home loan becomes a tradeable bond when someone pools it with many others and sells claims on the income they produce. The result is a mortgage-backed security, or MBS. Bruegel, the Brussels economic think tank, calls the practice bundling.
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The bank that made the loan does not have to keep it. It can exchange the loan for the MBS itself.
Who decides which loans go in?
Two Federal Reserve economists, Wayne Passmore and Roger Sparks, model the process as a game between two players.
- The securitiser moves first. It sets the terms of the MBS, including the rate it guarantees and the test a mortgage must pass to qualify.
- The bank moves second. It chooses which of its qualifying mortgages to hand over in exchange for the MBS.
That second step matters. The bank, not the securitiser, picks which eligible loans to part with.
Why a guarantee changes the bond
In the United States, much of the market runs through two giant government-sponsored agencies, Fannie Mae and Freddie Mac. Bruegel notes that their government backing lets them guarantee investors against borrowers failing to pay.
European industry points to that guarantee as the piece its own market lacks. The 2024 Noyer report, prepared for France Trésor, reflects the view that government help should let Europe catch up. Bruegel disagrees. It calls mortgage guarantees the worst part of the US system to copy broadly.
Pass-through against slices
The two markets do not even agree on what counts. Most US securitisation consists of pass-through MBS, which hand investors the income from the pooled loans without dividing the risk.
The EU works differently. A bundle there counts as a securitisation only once it is cut into tranches, or slices of risk. Senior tranches carry less risk and pay less, and junior tranches carry more and pay more. By the EU definition, a US-style pass-through MBS does not count as a securitisation at all.
Size differs too. Securitised assets remain a small part of Europe’s financial system, compared with their much larger role in the US. Even leaving out the agency-guaranteed securities, Bruegel puts US activity at many multiples of Europe’s.
What 2008 showed
The model’s reputation still carries the scar of the 2008 crisis. US institutions had bundled subprime mortgages, lent to borrowers unlikely to repay, into securities rated far higher than they merited. When those homeowners fell behind, the securities collapsed and the damage spread worldwide.
Bruegel reads the crisis as a failure of oversight rather than of bundling itself. Bad loans went in, so bad assets came out. Since then, bank capital rules have tightened, and US regulators have made it much harder to issue subprime loans and pass them on.
The Fed economists add a warning of their own. Their model found government-sponsored securitisation more likely to make financial crises worse and more frequent. That runs against the usual view that a “safe” MBS spreads risk and eases crises.
Where the EU goes next
The European Union proposed new securitisation rules in June, covering how much capital banks and insurers hold against bundled loans. Bruegel expects the reforms could be agreed in 2026.
The plan has support for simpler due diligence and reporting. Capital standards draw more debate. Some member states want a large easing, while banking and insurance supervisors want to stay close to the current rules. The European Central Bank both backs and questions parts of the package.
Bruegel notes that no one claims the reforms will transform Europe’s markets, and it argues that the loans going in, and the buyers coming out, deserve more attention than a copy of the US guarantee.
