What are mortgage-backed securities, why were they developed, what types of mortgage backed securities are there,...

What are mortgage-backed securities, why were they developed, what types of mortgage backed securities are there, and how do they work?

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Mortgage back securities are asset based securities which are provided against any loan amount as a security.Mortgage backed securities were developed to provide funds to the borrower and by selleing such securities at discount it provide funds to the lender.Mortgage back securities are developed for the purpose of providing funding to both lender and borrower and also acts as a mode of investment for the persons buying these securities from bank.In simple language we can say that bank acts as a middleman between the homebuyer and investment industry.The mortgage grant by bank sold to investors at a discount to raise funds in this way it works.

There are two types of mortgage based securities .

I) Pass throughs :- In this a trust is created in which all payments of mortgages are collected by trust and they will pay the investor the amount collected as pass through.Its life can be less than than stated maturity as it depends upon the payments of mortgages.

II) Collateralized Mortgage obligations :- It consist of multiple mortgage securities as a pool which is known as tranches.Based on credit rating allocated to the trances the rate of return of investors are determined.

jeff jeffy answered 1 year ago

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