In the last seven years, there has been one of the largest housing booms ever. Mortgage-backed securities are one reason why real estate growth is going so fast.
How to Understand Securities Backed by Mortgages
The main thing that a mortgage-backed security is is a bond. Investors buy shares in the mortgage security, and the income from the security is your monthly mortgage payment. The value of a mortgage, on the other hand, can change because it can be paid off early. A 10-year bond will definitely be paid off in 10 years, but a similar mortgage can be paid off at any time with a refinance or a cash payment.
Mortgage-backed securities are made by retail lenders, which is to say, the company that gives you a mortgage. Several things make them do this. The main reason is to make money available so they can use it for other things. If you have a 30-year mortgage, it will take the lender 30 years to get its money back and make a profit. In terms of money, that is a long time. To get around this, the lender sells securities on the secondary market, using your property as collateral. Basically, the mortgage lender borrows money from investors using your mortgage and home as a guarantee that the money will be paid back.
Mortgage-backed securities are another way for lenders to clean up their balance sheets. After the Savings and Loan crisis of the 1980s, new rules were put in place that require lenders to keep certain ratios of debt to equity. By selling mortgage-backed securities, lenders can make sure that their books are in line with the rules.
At first glance, mortgage-backed securities might sound a little strange and risky. In fact, they've been around for a while and are what drives the market. Government organisations like Ginnie Mae are involved in the secondary mortgage market. They guarantee many types of mortgages, which makes it easier for them to be sold on the secondary market.
As recently as 2004, it was thought that there were mortgage-backed securities on the secondary market worth over $729 billion. Because of the size of this investment, lenders can keep giving mortgage loans to people like you and me.
