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As a loan officer, mortgage rates affect every aspect of your business. One of the things that affect mortgage rates the most is mortgage-backed securities, which is why mortgage professionals need to know what it is and how they work in the market. Understanding will help you guide your clients towards more affordable financing at the right time and help them make better decisions.

Mortgage-Backed Securities Are Bonds

Mortgage-backed securities (MBS) are bonds secured by real estate loans. They are groups of mortgages packaged into securities to be sold in the secondary mortgage market. These securities are then sold to U.S. government sponsored enterprises such as Ginnie Mae, Fannie Mae and Freddie Mac to be used as guarantees for new securities.

Types of Mortgage-Backed Securities

There are a variety of mortgage-backed securities but the two most common are:

  • Pass-throughs
  • Collateralized mortgage obligations

Pass-throughs are a device in the form of a trust in which mortgage payments are transferred and distributed through to investors. A collateralized mortgage obligation is a more intricate type of pass-through security. The reason they are more complicated is because they are comprised of several groups of securities rather just one.

How They Work

Firstly, mortgage companies provide home loans to borrowers. Those loans are then sold by the mortgage company to the aforementioned government sponsored enterprises. The GSE will then package similar loans to create a mortgage-backed security. Finally, the mortgage backed-security will be sold off to corporate or individual investors.

The reason why mortgage-backed securities are an attractive investment is because they offer a return on investment that is higher than government bonds. Mortgage-backed securities provide mortgage lenders with more money to make more mortgage loans. The constant flow of mortgage funds keeps interest rates competitive and makes home financing readily available for borrowers.

Up Next: Understanding the Mortgage Production Line

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