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How Mortgage-Backed Securities Became Bonds: The Emergence, Evolution, and Acceptance of Mortgage-Backed Securities in the United States, 1960–1987


This article documents the emergence, evolution, and acceptance of mortgage-backed securities (MBS) by bond investors in the United States between 1968 and 1987. Drawing on an analysis of trade publications, securities prospectuses, and business press, I argue that MBS issuers’ eventual success at convincing bond investors to accept their products is especially remarkable given that bond investors had rejected most types of MBS issued between 1970 and 1983. My analysis suggests that the acceptance of MBS as bonds was an outcome of two approaches employed by the MBS issuers: (1) changing the attributes of their products to make them more bond-like, and (2) changing the meaning of the bond category by opening its boundaries to products that incorporated mortgage features. These two approaches to changing investors’ beliefs to promote innovation acceptance may undergird the diffusion processes for other financial innovations. Understanding the process of innovation acceptance may be especially important because market participants have short memories. Forgetting the assumptions made during innovation–acceptance processes can bring unanticipated consequences of innovation adoption, such as financial crises.

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I thank Adam Brandenburger, John Paul MacDuffie, Ashish Arora, Beth Bechky, Matthew Bidwell, Felipe Csaszar, Per Hansen, Dan Levinthal, Christopher McKenna, Ethan Mollick, Rowena Olegario, Lori Rosenkopf, Wesley Sine, Metin Sengul, Kenneth Snowden, Richard Sylla, Lawrence White, Tyler Wry, participants at the 2015 Wharton Technology and Innovation Conference, the 11th Smith Entrepreneurship Research Conference, and the 2016 Business History Conference for their helpful comments. I also thank Lynn Selhat for editorial assistance and Thomas Splettstoesser for assistance with the figures.

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