Explain four reasons of why an FI may prefer the use of either pass-through securities or CMOs to the use of MBBs? (not more than 100 words).

Answer: First, MBBs freeze mortgages on the FI's balance sheet for an extended period of time. Second, the amount of mortgages that are put up as security for the MBBs exceeds the amount of MBBs because of the over-collateralisation requirements to improve the credit rating of the MBBs. Third, the continued existence of the mortgages on the balance sheet requires capital adequacy and reserve requirement taxes for the FI. Finally, regulatory discouragement and the potential for regulatory intervention are becoming undesirable aspects of the use of MBBs.