MBS Co.
Practice this intermediate profitability case interview question in the Financial Services sector. Includes detailed problem prompt, clarifying questions, structured framework, and expert recommendation. Part of ProHub's 835+ consulting case library.
This case requires candidates to diagnose a ROC decline driven by adverse portfolio selection—banks are retaining high-quality mortgages while selling lower-quality loans to MBS Co. The solution involves both quantitative ROC analysis and strategic brainstorming around how to rebalance the portfolio mix, testing both analytical and creative problem-solving skills.
Clarifying Information
- MBS Co. buys individual mortgages from banks and packages several thousand of them into a given security. Shares in that security are sold to investors.
- When a homeowner makes a monthly mortgages payment, the payment passes through the bank first, then through MBS Co., then to investors (primarily institutional investors).
- MBS Co. keeps a small fee on each payment that passes through. The fee amount is based on a percentage of mortgage volume (i.e. how much money was loaned to homeowners).
- MBS Co. has one other GSE competitor that buys mortgages and creates mortgage-backed securities. The securities from both companies are fungible to investors.
- Banks can also choose to hold mortgages – rather than sell to a GSE – and keep the full monthly mortgage payments from homeowners.
- There is no target ROC. Any improvement in ROC would be considered a success.
- Return on Capital (ROC) = profits / capital
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