If you have studied debt securitization, to learn mortgage backed securities will become more easy for you. Mortgage backed securities are those securities which are issued on the mortgage of the properties of buyer of these securities. When company gets big loan from central bank, it is converted in small pools of securities. If these securities are issued on the basis of mortgage properties of the person who gets amount of debt, it will be mortgage backed securities. In case, if he will not pay the money, his property will be of the company. Company will sell his property for getting his given loan.
Types of Mortgage backed security
a) Residential mortgage backed security: This security is issued on basis of residential property
b) Commercial mortgage backed security
It is that security which is issued on the mortgage of commercial property.
Explanation of Mortgage Backed Securities with Simple Example
Suppose, Mr. Belly needs $ 100000 for starting his own business. He has his own house of $ 200000 and he will buy $ 100000 commercial building with $ 100000. So, he get $ 100000 loan, this loan will be on the mortgage of his own property. One is his own house and second is his new bought house. Loan provider bank will give his loan as security and one of its conditions will be mortgage backed. It means if Mr. Belly will be default to repay his loan, his own house or his bough commercial property will be of loan provider bank. At that time, it will be sold. At that time, company may get profit or loss on this deal. But before giving loan, company’s expert evaluates the mortgage property and what value will they get, if any loan will be default. Only profitable deal is accepted.