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What is a Mortgage Bond?

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  • Written By: Shannon Kietzman
  • Edited By: Niki Foster
  • Last Modified Date: 13 November 2016
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A bond is similar to an IOU. 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 or mortgage lending company. To borrow this money, the person must sign a promissory note stating he or she will pay back the value of the loan, plus a percentage of interest, which is accrued each month. Usually, a mortgage payment 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 mortgage lender offers a number of mortgage agreements in one lump-sum package to a financial institution, which issues a mortgage bond in return. In this situation, 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.

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In most cases, a mortgage bond is a win-win situation for both financial institutions. The recent increase in the value of homes, however, has caused some difficulty with this arrangement. Because homes were increasing in value, mortgage lenders issued loans to people who were not the ideal candidates. As such homeowners default on more loans, and the value of housing levels out, the bond may be worth more than the value of the house.

If the borrower defaults on the mortgage loan, the loss is passed on to the financial institution that issued the mortgage bond. To regain the money, the financial institution that issued the mortgage bond can resell the house. This can still result in a loss of money if the bond is worth more than the home.

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Discuss this Article

anon129989
Post 6

what is the difference between mortgage bonds and debentures?

anon117937
Post 5

Looks like the subprimes are back in the market with their original name: mortgage bonds. Mortgage bonds and subprimes are the same thing. So with all the problems we has with the other ones, maybe these should be allowed on the market any more.

Hopefully some judge will turn around a foreclosure on the fact the persons mortgage was paid by all the people who bought those bonds and the last one holding the subprime is responsible, not the first guy who asked for the mortgage so he could have a roof over his head and a job to pay for it.

As it is the banks fiddled and resold the mortgage so may times, his debt may have been paid off by all the people that were negotiating with his home and consequently caused his job loss and incapability to pay. If I were a lawyer, that's the route I would take.

anon39635
Post 4

what happens if you approve in a bond mortgage money. Does it mean your mortgage monthly payment will be higher? rhn09

jimmyfit
Post 3

Thank you for the definition, only we're looking for more specifics on the relationship between the lender and the financial institution they are borrowing from;

does the financial institution borrow the funds to the lender that are needed to purchase the homes that the initial borrowers are buying? in addition to giving the lender a bond that pays interest? And, if so, what is an average amount of interest or the spread that the financial institution will pay on a bond issued to a lender (being that the lender really has no investment other than time in the sales of the original loans?)

Or do we have this all wrong?

crystal43040
Post 2

What is a draft fund when closing on a house?

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