Mortgage Bonds

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Mortgage Bonds are a special type of bond and is essentially a debt instrument. In such a case the bond is a secured one and the underlying for the same is the real estate (namely, a property which may be of the commercial or residential nature). The security that is given behind the Mortgage Bonds may not always be a property, it may be any asset like the machines.

The risks for investment associated with the Mortgage Bonds are considered to be low and is more secured than any other form of investments. These bonds can be purchased or sold in the secondary market of the bonds by the investors. The investors who have purchased the Mortgage Bonds, they are known as the holders of the bonds. These people are entitled to receive a payment based on the rate of interest as well as the principal amount. The rate of interest associated with the Mortgage Bonds are very much related with the default risk of the borrower. Some of the aspects related to the entire economy as well as some of the specific ones cast their effect on the payments of the Mortgage Bonds. Such as the increasing rate of inflation has some adverse effects on the mortgage market and consequently this effect is translated to the Mortgage Bonds market. In this market of Mortgage Bonds, the weightage associated with any one of the mortgages is minuscule. The main idea behind this Mortgage Bonds is that a large number of mortgages are pooled together by an asset management company and hence the significance of a single mortgage becomes insignificant. The method adapted by the companies to come to a aggregated amount is either through WAM (Weighted Average Maturity) method or RAM (Remaining Amortization) method. The payments associated with the mortgage bonds are then collected by the agents meant for servicing and then this amount is passed to those agents known as the Central Paying Agent. Ultimately, the amount is then channelized to the investors.

Mortgage Bonds are basically of three types :-

  • First Mortgage BondsThese are the bonds where the underlying security is the commercial property of a company.
  • Second Mortgage BondsWhen the loans are taken by a company where the mortgaged property is the property of the company. Bt this one is different from the first because before availing the Second Mortgage Bonds, the borrower needs to square off the first one. This mortgage bond is considered to be having a more risky factor attached to it. As the risk is higher so the interest rates paid for this is also higher.
  • Third Mortgage BondsThese type of bonds are not observed generally. But these mortgage loans can be taken by an entity if and only if the first and the second ones are squared off. This mortgage bond is considered to be having a more risky factor attached to it and consequently the interest rates associated with it is much higher than the first two.
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