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Understanding Mortgage-backed Securities
By: Dave Lewis
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 obtaining a loan from investors by using your mortgage and home as the
guarantee of payment.
Lenders will also use mortgage-backed securities to clean up their balance
sheet. After the Savings and Loan crisis of the 1980s, new regulations were
created that require lenders to maintain certain debt to equity ratios. By
issuing mortgage securities, lenders can keep their books safely within the
relevant standards set by the regulations.
At first glance, you might think mortgage-backed securities sound a little fishy
and speculative. In reality, they have been around for some time and drive the
market. Government entities such as Ginnie Mae [Government National Mortgage
Association] are active in this secondary mortgage market, guaranteeing many
types of mortgages which makes them easier to sell on the secondary market.
As recent as 2004, it was estimated that over 729 billion dollars worth of
mortgage-backed securities existed on the secondary market. The size of this
investment is what lets lenders keep issuing mortgage loans to you and me.
About the Author:
Dan Lewis is with www.gwhomeloans.com - a San Diego mortgage brokers
providing San Diego home loans. Visit www.gwhomeloans.com/services.html
to learn more about options on San Diego mortgages from a San Diego mortgage
broker company.
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