Mortgage backed securities are a specific type of asset-backed security. Many types of assets can back a security, and a mortgage is one of them. What is even more common in the United States is for mortgage-backed securities to be grouped or “pooled” together. These pools can sometimes include hundreds of individual mortgages. Mortgage-backed securities do not discriminate between residential and commercial mortgages- either can apply.
If “mortgage-backed securities” is a phrase that sounds familiar, it is because it played a large role in the recent economic crash. Starting around the years 2007-2008, thousands of low quality mortgage-backed securities began to fail. There are many different types of these securities, including residential, commercial, stripped, collateralized mortgage obligation, prime mortgages and more.
There is a significant credit risk with mortgage-backed securities. These types of securities succeed and fail based on whether or not the borrower (homeowner) pays their mortgage. In the early 2000s, banks were far too willing to issue home loans to individuals and families. When homeowners started collectively falling behind on their payments, the bubble burst.
Who issues these types of securities? There are a few major players in the mortgage-backed securities game, but the two most well-known are Fannie Mae and Freddie Mac. “Fannie Mae” is a shortened version of “Federal National Mortgage Association” and “Freddie Mac” is the name used for the Federal Home Loan Mortgage Corporation. These are both government-sponsored enterprises, which means it was created by Congress and acts as a financial service.
Even now that the housing market is on the upswing, lenders are still very selective with who they choose to give home loans to. Before buying a home or refinancing your current mortgage, be sure to do your research so you find the best mortgage rate possible. A low mortgage rate increases your chances of making payments on time and avoiding foreclosure.