What Is A Mortgage Bond?
A mortgage bond is one by which holders can lay claim to securities backed by a mortgage, that is, real estate holdings or property.
Real estate assets that are put up as collateral can be claimed in the case of a mortgage bond.
Lenders sometimes sell collections of mortgage bonds to investors who, in turn, get paid interest on each of the mortgages until they are paid off.
Any default on the mortgage holder leads the bondholder to foreclose on the house and get the reward or compensation immediately.
Mortgage bonds are generally safer investments than corporate bonds and thus, have lower return rates.
Once the purchase of a home is made and financed with a mortgage, lenders rarely retain ownership of the mortgage.
Instead, they sell the mortgage on the secondary market to another party, an investment bank, or a government-sponsored enterprise (GSE).
Any one of the parties, as outlined above, adds the said mortgage to a pool of others and, with them, issues bonds as backed by the mortgages.
A mortgage bond is one where investments are protected because a valuable asset ensures the principal. This safety leads to lower interest rates accruing to them compared to government bonds.
In the case of defaults, mortgage bondholders can mobilize funds from the sale of the collateral security, which covers the default and ensures prompt payment of the dividends.
Mortgage Bond Example
Suppose an individual obtains a home on a mortgage plan and has secured the mortgage. In that case, the lender of the mortgage might choose to sell it off as a mortgage bond on the secondary market to any other party such as an investment bank or a government-sponsored enterprise who then get directly paid the interests on the mortgage as their dividends.
It is a very safe investment for the investors to explore and the returns reflect the level of security in the investment. However, where necessary, the investors might be forced to finally sell off the properties due to default on the borrower’s part.« Back to Glossary Index