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What Is A Mortgage Bond? A Guide To Mortgage Bonds And The Bond Market

Jamie Johnson2-minute read

March 12, 2021

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It may surprise you to learn that the process is not over after you close on a mortgage. There’s nothing left for you to do, but in all likelihood, your lender will immediately sell that mortgage in a pool of other mortgages.

This is what’s known as a mortgage bond, and it’s a type of mortgage-backed security (MBS). Mortgage bonds protect lenders and make it possible for borrowers to invest in real estate at an affordable price point. This article will explain what a mortgage bond is and how it affects the real estate market. 

Mortgage Bond Definition

Lenders sell a mortgage bond to real estate investors, who receive interest payments on mortgage loans until they are paid off. An investor has a claim on the assets put up as collateral, such as a house, and can possess them in the event of a default.

Since a group of assets secures mortgage bonds, this offers some protection to the bondholder. If a borrower defaults on their mortgage, the bondholders can sell the collateral to ensure the principal gets paid.

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How Do Bonds Affect Mortgage Rates?

If you take out a mortgage through a bank, the bank will not typically retain ownership of that mortgage. Instead, the bank will securitize a group of mortgages into a financial product called a mortgage-backed security (MBS).

These assets are then sold to an investment bank or government-sponsored enterprise, which then sells it to investors. The MBS investors will earn interest payments, but they also take on the risk of default.

Mortgages and the bond market have an inverse relationship with each other, so if bonds are expensive, that means mortgage rates will be low. And alternatively, when bonds are inexpensive, mortgage rates will be high. 

Government-Sponsored Enterprises

A government-sponsored enterprise (GSE) is a government-created financial services corporation designed to improve credit flow to certain parts of the economy. They don’t lend money directly but instead facilitate and make borrowing easier for individuals.

Fannie Mae and Freddie Mac are probably the best-known examples of a GSE. These organizations help the real estate market operate with more efficiency and transparency.

In particular, they ensure that both MBS investors and homeowners can safely invest in real estate. Since MBSs are backed by the U.S. government, they are a more secure and low-risk investment. 

Why Invest In The Mortgage Bond Market?

Investors choose to purchase mortgage bonds because they’re looking for reliable and safe income. Most investors consider bonds a safe investment because of the real property security and option to sell the foreclosed property to pay off the debt.

Most investors favor MBSs over treasury bonds as the safer investment. That’s because mortgage bonds are secured by real property and the U.S. government. This makes them a good option for more conservative investors.

A mortgage bond can also be a good source of reliable income. When a homeowner takes out a mortgage, they’re not only expected to make payments on the home loan, but they also make interest payments. These recurring payments can create a stable source of income for investors.

The Bottom Line

Once you close on your mortgage, it may be bought and sold multiple times over the life of the loan. Mortgage bonds are a safe and reliable investment for conservative investors and allow lenders to make mortgages more widely accessible to consumers.

If you’re investing in buying a home in the next year, it may benefit you to learn more about how the home buying process works. Or if you’re ready to get started, you can apply today for a mortgage with Rocket Mortgage®.

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Jamie Johnson

Jamie Johnson is a Kansas City-based freelance writer who writes about a variety of personal finance topics, including loans, building credit, and paying down debt. She currently writes for clients like the U.S. Chamber of Commerce, Business Insider, and Bankrate.