A mortgage bond is one that is backed by mortgage loans from the entity that issues them and that pays the buyers interest on the installments paid by the borrowers.
Therefore, these types of titles are linked to mortgages. In turn, these guarantee the payment of interest and amortization of capital. Also, they are usually backed by real estate. Like other financial assets, for example the mortgage certificate, they also have a secondary market for their purchase and sale. In this way, the holder is not obliged to keep it until maturity.
How a mortgage bond works
The bank, on many occasions, usually sells mortgages in the markets. In this way, you get liquidity. Normally the buyer is usually an investment fund, other banks and even some state agency. What they do is pack several of them into a single bond and issue it. The investor receives interest and the return of the capital at maturity.
If the mortgaged pay regularly, this title is a guarantee of security and source of income. Now, if there is a case of default, these bondholders have the right to claim on the defaulter's home. This does not happen with corporate bonds whose guarantee is the company that issues them. Therefore, the guarantee of the former is greater.
Differences with mortgage bonds
Although they may appear similar, the differences between them are important. The certificate is a fixed income security that is issued exclusively by credit institutions. Thus, for the bonds to be amortized, there must be an authorization from the group of banks that issued them, unlike the ID, with which the issuer can operate freely.
On the other hand, the cell is backed by the bank's entire mortgage loan portfolio. The bond, however, is guaranteed by a specific series of them. These will appear on the issuance document and must be reported to the buyer. Thus, the guarantee is limited only to those loans, unlike the certificate where it is global.
A bad example, subprime mortgages
We could not finish without mentioning one of the worst examples of this type of degree, those that appeared with mortgages "Subprime" and the 2008 crisis. In summary, American banks could grant a series of mortgages to people with limited resources. The calls Ninja (people without income, without work and without assets) hired them and later, in many cases the fees were not paid.
What they did was create a series of mortgage packages or bonds. The problem is that to sell them, too many times they disguised themselves with good credits. This caused the rating agencies to give them a good grade and investors bought. This bubble was generated in the years prior to 2008, coinciding in many countries with price inflation in the real estate sector.
But there is a saying that can be applied here and that is that the rotten apple ends up spoiling the rest of the basket. In this way, when they wanted to collect the guarantee, once the crisis broke out, it was made up of homes with values much lower than the loan. This situation, along with other factors, caused the crisis. A bad example of a mortgage bond.