What are mortgage bonds?

by: David Field
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Word Count: 310

Bonds are effectively the process of investing in a financial institution with the promise of receiving all of one’s investment back, with interest on top of this. If a person wants to get a mortgage, then they go to a bank, receive a lump sum of money and then have to pay it back over time with accrued interest. Purchasing bonds is the opposite scenario, and the bank uses the investor’s money to help with its operations.

When a person requests a mortgage from a mortgage lending company, the company may have to look to a major financial institution in order to borrow the money before lending it on to the customer. With mortgage bonds, the large institution lends the money to the mortgage company, but then signs an agreement that allows it to "purchase" the mortgage agreement from the lending company and receive the borrower’s repayments directly. This appears to be a win-win situation for all parties involved – the lending company gets the money it needs to issue the mortgage, and the institution receives it back (with interest) through the repayments.

The situation can arise where the borrower defaults on their mortgage (does not make the repayments), and this has been happening a lot at the moment in the US housing market due to lending companies giving money to people who were not ideal candidates. In this case, the mortgage bond might actually come to be of more value than the house and the loss is then passed on to the financial institution that issued the bond. To recoup any money that they have lost, they can resell the house, but if the housing market is in as bad a state as it currently is, this might still result in a loss as the bond is worth more than the sale value of the house.

Article Source: http://www.ArticleStreet.com/profile/david-field-6014.html

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