asset-backed security

Question

Mortgage-backed securities = A type of asset-backed security that is secured by a mortgage or collection of mortgages. When you invest in a mortgage-backed security you are essentially lending money to a home buyer or business. An MBS is a way for a smaller regional bank to lend mortgages to its customers without having to worry about whether the customers have the assets to cover the loan. Instead, the bank acts as a middleman between the home buyer and the investment markets. This type of security is also commonly used to redirect the interest and principal payments from the pool of mortgages to shareholders.Please explain to me the emboldened sentence. Also what is "asset-backed security"?

Feebs11 · Accepted Answer

Asset-backed security: A security that is based on something or things that you own [your house, for instance}

Mortgage-backed securities = A type of asset-backed security that is secured by a mortgage or collection of mortgages >> Securities based on a mortgage or many mortgages

User_gary · Answer

Thanks Feebs11.

but i couldn't understand what you mean by "mortgage" here.

I thought "mortgage" is an agreement which allows you to borrow money from a bank or similar organization, especially in order to buy a house or apartment, or the amount of money itself:

Also what you mean by "collection of mortgages"?

Please help me.

BarbaraPA · Answer

Gary, the world of finance is very complicated. If you truly need to understand this for a current assignment, we can help you, but it's something that most native-English speakers don't understand unless they work in this industry.

Is it simply your idle curiousity, or do you have a driving need to know this?

This is a very simple view, but it may give you the idea you need.

I take out a loan for my house from Bank A. So do 99 other people. My mortage is with Bank A. Bank A takes these 100 mortgages and puts them in a bundle.

Bank B buys this bundle of mortages from Bank A. That means that Bank A now has a lot more money again and can loan money to a new 100 people to buy homes. That is basically what Fannie Mae and Freddy Mac do -- they are Bank B.

100 people have promised to pay Bank A for their houses, so Bank B now has this obligation to pay as something that makes it feel it will get its money. It could end there.

Or, Bank B could group this bundle of 100 loans into a package, with 100 loans that it bought from Bank C and another 100 from Bank D. It could create a huge package of loans and then sell shares of this package. A thousand people could buy shares of this package of 300 loans. That gives new money to Bank B, so that Bank B can buy the next group of loans that Banks A, C, and D have made.

As the people pay their mortgages, it goes to Bank B who then pays the people who own the thousand shares.

User_gary · Answer

Thanks a lot Grammar Greek. Now I have almost got it.

Feebs11 · Answer

User_garyThanks Feebs11.

but i couldn't understand what you mean by "mortgage" here.

I thought "mortgage" is an agreement which allows you to borrow money from a bank or similar organization, especially in order to buy a house or apartment, or the amount of money itself:

Also what you mean by "collection of mortgages"?

Please help me.

mortgage 1 a legal agreement by which a person takes out a loan using as security real property (usually a house which is being purchased). 2 an amount of money borrowed or lent under such an agreement. From O.Fr. morgage (13c.), mort gaige, lit. "dead pledge", from mort "dead" + gage "pledge;" so called because the deal dies either when the debt is paid or when payment fails.

As GG points out, the company that make the loans can put them together to form a bundle.
Equally, you can take out more than more mortgage against a property and use these loans as security for another transaction.

Anonymous · Answer

please explain to me about mortgages

BarbaraPA · Answer

This is an English forum, not a finance forum. A mortgage is simply a loan used to purchase a house.  If you have a specific question, please ask.

Anonymous · Answer

asset backed securities

BarbaraPA · Answer

Do you have an English question? This is not a finance forum.

asset-backed security

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