Mortgage backed securities were first created in 1970 when Ginnie Mae, realized that the fragmented mortgage market kept potential buyers away. Until that time, lending institutions, usually banks held on to the mortgages they originated until the principal was paid in full. Because of this loan policy, the necessary capital to offer new buyers loans made financing harder to come by.

By assuring investors that mortgages, bundled and sold, as a single security would be paid, money flowed into the market place. The additional capital made available to potential buyers opened the housing markets to previously excluded buyers.

Since then, the market has grown to almost three trillion dollars by the end of 2003. That number has declined somewhat to just under $2 trillion by the end of last year.

As a stand-alone investment, mortgage backed securities offer limited risk. Investors would often combine the securities with other types of bonds or securities secured by different assets classes. Additional agencies such as Fannie Mae and Freddie Mac jumped in with securities offers and what was once a rather staid investment became a hot commodity.

The trickle down effect of this went in two directions. There was an increase in the types of mortgages made to riskier buyers as we have noted in the previous two parts of this series. With so much available capital pouring in, lenders began offering products to borrowers who would not have qualified otherwise.

The second effect of this was the attention that Wall Street gave the industry. Once investors began looking at these securities as viable investments that could produce better than average returns, money poured in.

Loans made to the sub-prime borrower tended to create a higher return because the underlying loans had higher interest rates. Even with the understanding of increased risk, investors turned a blind eye and poured additional money into this type of investment.

These types of securities are rated for risk. The direct result of so many newsworthy defaults in the sub-prime markets and the possibility that the downward trend will not only continue but spill over into other less risky mortgages has resulted in an overall lowering of the ratings for mortgage backed securities.

When the downgrades begin, investors usually sell. That creates a further cascade forcing banks and lenders to tighten the availability of such loans.

Foreclosures estimates for 2007 are expected to reach 1.3 million. These additional homes add to the already higher than normal inventory of available houses driving prices down. It is important to remember that each 1% increase in housing prices keeps 70-80,000 foreclosures from occurring. With inventories of unsold homes rising, the nationwide average home price is expected to fall 5%.

There are two things you can expect in the near future. First, the Federal Reserve Board, who has made it clear on numerous occasions that its focus is tied to the inflation/employment outlook, will not jump in to save a lagging economy suffering with outstanding or poorly secured debt.

The second is the effect of just such a policy. Each new home results in two new jobs. Remove that and you have no new job growth. State tax revenues will fall as a result of this housing slump and that will trickle down to services used by those who are unable to work. Plans to shore up insurance coverage for the less fortunate will be put on the backburner.

Pensions, who buy investments like mortgage-backed securities will find their projections once again short of where they expected. In many instances, older investors who have moved their money into less risky positions as they have aged will find those conservative positions at risk. The last investment standing, the stock market will begin to feel the pressure by year's end expanding the effect to all investors.

There is hope but it requires a change in how you view your mortgage. If your monthly payment to the loan on your home exceeds 50% of your income, there is little likelihood you are making the most of your 401(k) and paying your taxes. The later two often eat up 40% of a workers household income. Add that to 50% and you have almost nothing left over for day-to-day expenses.

Your mortgage has a direct impact on how you weather financial storms, position yourself for retirement, and ensure the wellbeing of your family. If you have extended your personal risk by purchasing more square footage than you can afford or a loan that will seriously effect your future earnings, now is the time to fix those problems.

Before you begin searching for a solution find out what your credit score is. This will directly affect the cost of any new fixed loan you may be applying for. Do this six months before trouble such as adjustable rate resetting takes place.

Go for the tried and true fixed rate mortgage. This loan may not be as creative or offer you the most house for the least amount of money, but the option will allow you to calculate worse case scenarios much better.

As the economy slows and although predictions on how much still are wide ranging, you will be better insulated from sudden shocks. Looking at your home the way your parents may have looked at theirs may take some getting used to but the end result will be much easier to sleep on. A home is not an investment. It is the largest debt you own and the shelter you count on.