Understanding Mortgage Backed Securities

Understanding Mortgage-Backed Securities
The housing boom of​ the​ last seven years has been one of​ the​ biggest ever .​
Mortgage-backed securities are one reason for the​ torrid pace of​ real estate growth.
Understanding Mortgage-Backed Securities
A mortgage-backed security is​ essentially a​ bond .​
Investors purchase interests in​ the​ mortgage security and your monthly mortgage payment is​ the​ revenue earned from the​ security .​
Unlike a​ bond,​ however,​ the​ value of​ a​ mortgage fluctuates because it​ can be paid off early .​
a​ 10-year bond definitely matures in​ 10 years,​ but a​ similar mortgage may be paid off at​ any time with a​ refinance or​ outright cash payment .​
Mortgage-backed securities are issued by retail lenders,​ i.e.,​ the​ lender giving you​ a​ mortgage .​
They do this for a​ number of​ reasons .​
The primary reason is​ to​ create liquidity so they can use the​ money for other purposes .​
If you​ have a​ thirty-year mortgage,​ the​ lender is​ going to​ have to​ wait thirty years to​ recover its money and profit .​
That is​ a​ long time in​ the​ world of​ finances .​
To overcome this,​ the​ lender sells securities on​ the​ secondary market and your property acts as​ the​ collateral for the​ security .​
Essentially,​ the​ mortgage lender is​ obtaining a​ loan from investors by using your mortgage and home as​ the​ guarantee of​ payment .​
Lenders will also use mortgage-backed securities to​ clean up their balance sheet .​
After the​ Savings and Loan crisis of​ the​ 1980s,​ new regulations were created that require lenders to​ maintain certain debt to​ equity ratios .​
By issuing mortgage securities,​ lenders can keep their books safely within the​ relevant standards set by the​ regulations .​
At first glance,​ you​ might think mortgage-backed securities sound a​ little fishy and speculative .​
In reality,​ they have been around for some time and drive the​ market .​
Government entities such as​ Ginnie Mae [Government National Mortgage Association] are active in​ this secondary mortgage market,​ guaranteeing many types of​ mortgages which makes them easier to​ sell on​ the​ secondary market.
As recent as​ 2004,​ it​ was estimated that over 729 billion dollars worth of​ mortgage-backed securities existed on​ the​ secondary market .​
The size of​ this investment is​ what lets lenders keep issuing mortgage loans to​ you​ and me.

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