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...
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