Mortgage Backed Securities

The term itself may seem a bit intriguing... but is a very good concept and mortgage lenders are earning a lot of profits by investing this way. It is very important to understand what mortgage based securities mean. Mortgage based securities mean a secured interest and principal payments in a pool of mortgages. Let us elaborate this further for better understanding. A financial institution or a bank sanctions a mortgage loan to either finance or refinance the purchase of a home or any other property. The mortgage loans have varying terms and the balance is gradually reduced during the life of the loan until the total amount is paid. The repayment of the loan is done in installments which includes the principal and interest. Now since these mortgage loans take a very long time to be repaid the lenders, in order to replenish their funds sell groups of mortgages into the secondary mortgage market to those who issue mortgage backed securities. This is a guarantee for timely payment of principal and interest.

Mortgage backed securities come in a wide variety of structures, the most basic type being pass through participation certificates. These entitle the holder to receive a proportionate share of all principal and interest payments that are made on the pool of loan assets.

Some MBS may be more complicated known as collaterized mortgage obligations or mortgage derivatives which are so designed that they protect or expose investors to various types of risks, a very prominent risk being prepayments. Mortgage backed securities are a great option for lenders as they secure themselves in terms of repayment.