A mortgage bond is a bond secured by a mortgage on one or more assets.Â These bonds are typically backed by real estate holdings and/or real property such as equipment. In a default situation, mortgage bondholders have a claimÂ to the underlying property and could sell it off to compensate for the default. Mortgage bonds offer the investor a great deal of protection in that the principal is secured by a valuable asset that could theoretically be sold off to cover the debt. However, because of this inherent safety, the average mortgage bond tends to yield a lower rate of return than traditional corporate bonds that are backed only by the corporation’s promise and ability to pay.
AÂ mortgage bondÂ is aÂ bondÂ backed by a pool ofÂ mortgagesÂ on aÂ real estateÂ asset such as aÂ house. More generally, bonds which are secured by the pledge of specific assets are called mortgage bonds.
An investor purchases a bond from a financial institution for a fixed amount of money. The financial institution then promises to give the money back years from that day with a small percentage of interest added to the original value. When a person purchases a house, he or she generally must borrow money from a bank orÂ mortgageÂ lending company. To borrow this money, the person must sign aÂ promissory noteÂ stating he or she will pay back the value of the loan, plus a percentage of interest, which is accrued each month. Usually, aÂ mortgage paymentÂ spans fifteen to thirty years and is paid back in monthly installations. To issues these loans, the mortgage lending company may need to “borrow” a large sum of cash from a larger financial institution. The mortgageÂ lenderÂ offers a number of mortgage agreements in one lump-sum package to a financial institution, which issues a mortgage bond in return. With a mortgage bond, the larger financial institution “purchases” the mortgage agreement from the mortgage lender and receives the borrower’s monthly payment in exchange. The mortgage bond process helps the mortgage lender get the money it needs, while the larger financial institution earns extra money by receiving the monthly payment from the borrower. If the borrower defaults on theÂ mortgage loan, the loss is passed on to the financial institution that issued the mortgage bond. To regain the money lost from the mortgage bond, the financial institution that issued the mortgage bond can resell the house. This can still result in a loss of money if the mortgage bond is worth more than the home.
A bond that consolidates the issues of multiple properties. If the properties covered by the consolidated mortgage bond are already mortgaged, the bond acts as a new mortgage. If the properties do not have outstanding mortgages then the bond is considered the first lien. It can be used as a way to refinance the mortgages on the individual properties.
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