Mortgage Based Securities

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Mortgage Based Securities

Mortgage backed securities are investments under which investors may buy and use much for instance bonds. They are also debt obligations that stand for claims to the residential property and cash flows from pools of mortgage loans. This mortgage loans are purchased from banks or mortgage companies and then are assembled into pools by the private entity, governmental or quasi-governmental (Fabozzi& Modigliani, 1992). The body then offers securities that take the place of claims on the payments made by borrowers on the loans in the pool, this process is known as securitization. The Government National Mortgage Association issues most mortgage-backed securities.

These securities are developed when a company for instance the bear Stearns buys a bundle of mortgages from a primary lender that is from the company that issues the mortgage. These securities assist the mortgage lenders in selling the mortgages they make thus doing away with their coffers and allowing them to lend them again. The buyers of mortgage-backed securities take security under the knowledge that the value of the bond does not rest on the creditworthiness of one borrower but on a collective worthiness of a pool of borrowers.

Lenders of mortgages wanted to ensure that their risk was well managed so that they could raise interest from the borrowers who had an adverse credit history. However, the interest rates continued to fall I the housing market and thus many people created interest on getting mortgages. As a result, lenders of mortgages came up with more and more risky loans. Eventually, the lending organization came to recognize that they were not balancing risk well. As a result, lenders decided to come up with mortgage backed securities which could balance the risk of the loans. This is how mortgage backed securities were developed.

Securitization came to exist with lenders creating this method to make use of risky mortgages as they make profits. Lenders bound up mortgages in pools hence sold them to large mortgage companies as investment tools. The amount paid by these companies to the investors varied according to the mortgage. However, lenders could receive money for the loan immediately rather than waiting for the monthly payments made by borrowers.

Types of mortgage backed securities

There are two types of mortgage-backed securities. First is the pass-through backed security that is in a form of a trust-through where mortgage payments are collected and distributed to investors. In other words, it is in a form where by mortgage payments are passed through to the investors. Most of the pass-throughs state maturity of 30 years, 15 years and also five years. In addition, fixed rate mortgage, adjustable rate mortgage and other several mortgages. These are pooled to create the securities, mostly back this type of mortgage-backed security. Since these mortgages pass through, the principal amount received is less than the stated maturity life. However, this varies depending on the pay down experience of the pool of mortgages underlying the bond.

Collateralized mortgage obligations (CMOS) are another type of mortgage based securities, which is a complex type of pass throughs security. CMOS are made up of many pools of securities, and these pools are known as tranches. Each pool operates with accordance to its own set of rules by which interest and principal become distributed. Many bond funds invest in CMOS on behave of individual investors (Fabozzi& Modigliani, 1992).

Mortgage backed securities are sold by mortgage companies to investors who played a vital role in making them part of their portfolios. These securities are extremely crucial since they are an addition to other options like bonds. The payments made by borrowers flow through and thus become payments to investors. These securities depend on the ability of the borrowers to pay off their loans rather than depending on solvency of a single mortgage