Mortgage Backed Securities

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Mortgage Backed Securities can be referred to as asset backed securities, where the flow of funds is supported by the regular payments towards the principal amount and payments of interests for a number of mortgage loans.

Advantages of Mortgage Backed Securities:

The need of mortgage backed securities has been felt in the past few years by the mortgage originators to refill their investments. The mortgage backed securities aid in the development of new instruments to collect funds from the market, as the mortgage backed securities are usually very economic and more effective than the other financing instruments offered by the banks and the other forms of financing issued by the central government. The mortgage backed securities mainly aid the companies dealing in these securities, to posses a better alternative than the assets owned by them. The financing companies will now be relieved of the costs of maintenance of the assets and other costs related to assets, which will reduce their overheads immensely and increase the profit ratio.

Special Feature of Mortgage Backed Securities:

The commercial mortgage-backed securities are bought in exchange of offices, manufacturing units, land, multi-story buildings, and hotels, which means that they are gained against the personal or commercial holdings. The loans provided in lieu of the above mentioned collaterals can be extended beyond 5 years at fixed interest rates and may not provide the facility of paying off the loans before the specified tenure. These loans are also stretched over shorter periods like a maximum of 3 years with the facility of payment before time and are mostly accompanied by adjustable interest rates.

Exceptions to Mortgage Backed Securities:

The mortgage-backed securities can, however, prove problematic in case of the home mortgage lenders of the United States of America, as home loan applicants there are provided with the facility to make the loan payment before time to cover up a part of the next month's interest amount. Such activities have a deep impact on the loan amount and the inconsistencies in payment make it difficult to have an idea about the exact amount of funds to be obtained at every month from the mortgage-backed securities.

Kinds of Mortgage Backed Securities:

The mortgage backed securities can be divided into various kinds, but the most prominent mortgage backed securities are:

  • Commercial mortgage backed securities
  • Collateralized mortgage obligation
  • Stripped mortgage backed securities
  • Residential mortgage backed securities

The residential mortgage backed securities (RMBS) are special bonds found in the security market in the US and are the kind of securities which are supported by private property especially the house of the mortgagor, this private property here serves as the collateral. The stripped mortgage backed securities (SBMS) can be further classified into two kinds- the interest only stripped mortgage backed securities and the principal only stripped mortgage backed securities. The interest only stripped mortgage backed securities are supported by the interest payments towards the collateral of the mortgagor, whereas the amount that is paid towards the principal amount of the collateral of the mortgagor supports the principal only stripped mortgage backed securities. The commercial mortgage backed securities are supported by the properties used for business purposes.

Last Updated on 5/26/2011