What Are Mortgage Backed Securities? How Are They Created?

When a borrower desires to buy a home, they go to a lender to apply for a mortgage mortgage. One is to maintain the loan in their portfolio and earn money from compensation of the principal and curiosity on that mortgage. Another is to sell that mortgage loan to another lender or establishment and use the proceeds from this sale to originate another mortgage. The riskier tranches are subjected to extra uncertain money flows and have greater publicity to default threat. However, they provide higher interest rates, which compensate for the upper danger, making them extra enticing to some buyers. Unlike holders of conventional fixed-income bonds, most MBS bondholders obtain month-to-month interest funds – not semi-annually.

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