Homing In on Mortgage-Bond Types
We explain the difference between residential and commercial issues, and agency and nonagency issues.
Question: I know there are several different types of mortgage bonds. Can you explain what they are?
Answer: Like most bonds, a mortgage-backed bond is a type of debt security in which the bondholder essentially finances a loan in exchange for periodic interest payments and, ultimately, a return of principal. But unlike, say, a government bond, in which the entire loan amount goes to a single borrower--such as the federal, state, or local government--these bonds are backed by baskets of loans, each made to purchase or build property, that have been packaged into a tradable security. These are known as mortgage-backed securities, or MBSs. In their simplest form, the mortgage pass-through, as the borrowers pay off principal and interest, these cash flows are passed on to the bondholder.
Adam Zoll does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.