MORTGAGE BACKED

SECURITIES
 • A mortgage is a loan that the borrower
uses to purchase or maintain a home or
other form of real estate and agrees to pay
back over time, typically in a series of
regular payments. 
MORT GAGE • The property serves as collateral to secure
the loan.
• Mortgages are available in a variety of
types, including fixed-rate and adjustable-
rate.
 • Mortgage-backed securities also known as
MBS is an asset-backed security issued by
larger financial corporations (bond
issuers) representing a pool of mortgages
MORT GAGE into a single financial instrument. 
B ACK ED • The various investors are provided with
SE CU RITIE S periodic payments on principal and
interest similar to coupon payments.
• The MBS undergoes a securitization
process.
 • Securitization is the process of taking an
illiquid asset, or group of asset, and
through financial engineering,
tranforming them into a tradable security.
S E C U R I T I Z AT I O N • A financing company could use
securitization by packaging multiple loans
together and sell the security created to
another investor.
SECURITIZATION CONCEPT
Securitization process
 • Borrowers: The borrowers are responsible for
payment of interest and principal to the loan
originator.
• Originators: Institution that lends mortgage to
M A J O U R P L AY E R S I N borrowers. And also transfer the pool of assets to
S E C U R I T I Z AT I O N   the issuer(SPV).
• Trustee: The trustee is a third party retained for a
fee to administer the trust/SPV that holds the
underlying assets supporting a mortgage-backed
security.
 •  Servicer: Company that receives
payments from borrowers.
• Issuer: usually SPV/SPE that handles
M A J O U R   P L AY E R S   I N  
securitization.
S E C U R I T I Z AT I O N
• Investors: Trade in MBS.
• Rating agencies: Rate the securities
issued by special purpose entity.
 • An SPV, or a special purpose entity (SPE), is a
legal entity created by a firm (known as the
sponsor or originator) by transferring assets to the
SPV, to carry out some specific purpose.
• SPVs have no purpose other than the
SPECIAL transaction(s) for which they were created, and
PURPOSE they can make no substantive decisions; the rules
governing them are set down in advance and
VEHICLE (SPV) carefully circumscribe their activities.
• These securitization SPEs are considered
“bankruptcy remote” .The SPV makes its
obligations secure even if the parent company goes
bankrupt.
  Pass-through mortgage backed securities
TYPES OF • Residential mortgage-backed security (RMBS)
MORTGAGE • Commercial mortgage-backed security
BACKED (CMBS)

SECURITIES  Collateralized mortgage obligations

 • A pool of fixed-income securities backed by a
package of assets.
• A servicing intermediary collects the monthly
PASS-THROUGH payments from issuers, and, after deducting a fee,
remits or passes them through to the holders of the
MORTGAGE pass-through security.
BACKED • There are two subtypes of pass-through mortgage
SECURITIES backed securities
• Residential MBS: backed by mortgages on
residential property such as mortgages & home loans.
• Commercial MBS: backed by commercial
mortgages rather than residential real estate.
 • A type of mortgage-backed security in which
principal repayments are organized according to
C O L L AT E R A L I Z E D their maturities and into different classes based on
M O RT G A G E risk.
O B L I G AT I O N S • Payments received from the mortgages is passed to
investors based on a predetermined set of rules,
and investors receive money based on the specific
mortgages invested in.
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