What Exactly Are Mortgage-Backed Securities?

real estate

Understanding mortgage backed securities just got a whole lot easier!

Every time the real estate market suffers a housing crisis, families are typically left with serious financial problems and financial institutions are left with extreme losses. In fact, all this hardship can be accredited towards mortgage-backed securities (MBS) which in essence are shares of a home loan which are sold to investors. However, to truly understand an MBS requires a thorough recap of how mortgage-backed securities originated.

The Creation Of A Mortgage Backed Securities

A homeowner is looking to purchase a new home and needs a mortgage from the bank. After getting approval, the homeowner gets money from the bank to purchase a new home. However, this loan is conditional on the fact that the homeowner will promise to pay the bank back on a regular basis. As a result, the lender now has a couple different options to choose from: it can collect the money plus interest that the homeowner owes over the next years or, the bank can sell the loan to a company who will provide the bank with even more money to make additional loans while collecting a fee before turning over the homeowner’s mortgage to the company. When the bank chooses the latter option and the company they sent the homeowner’s loan to has done this same thing with a bunch of other mortgages, they add this specific mortgage to their already inflated pool of mortgages. This pool of mortgages is an MBS.

And Then It All Falls Down

This all sounds great in theory. Everyone is getting what they want. However, the cookie crumbles when banks began lowering their standards for home loans and offered loans to anyone and everyone. As a result, the risks were not fallen on the banks for issuing a loan to a prospective homebuyer who really couldn’t afford to pay back the loan given. Instead, the risks had fallen on the companies that purchased the loans from the banks which subsequently leaves MBS investments worthless as soon as the homebuyer could no longer afford to keep up with the payments.

A Title Company You Can Trust: Colony Title

At Colony Title, we will help you through the process of getting your property’s title and help you avoid the pitfalls of hidden costs while you buy your home. We are also well trained in identifying any and all errors in public records and helping you resolve them. We specialize in real estate title insurance in both Maryland and Washington, D.C., and we will perform an expert title search, check through all past documentation, and examine records for any fraud or forgery. For more information on how we can get you into the home of your dreams, contact us online or give us a call at (410) 884-1160. To get more updates on housing markets and how to get into your home, follow us on Facebook, Twitter, LinkedIn, and Google+.

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