Read the textbook, name the four major classes of mortgage-related securities. As an issuer, explain the reasons for choosing one type over another. Please elaborate by expressing your thoughts about your findings in at least 5 – 6 sentences.
The four major classes of mortgage related securities are as of the following:
- Mortgage-Backed Security: Just like what is mentioned in the name of the mortgage, it is backed by the collateral of the asset or the property. Mortgage backed security issued mortgage securities that is backed with the property as lien against the borrower.
- Mortgage Pay Through Bonds: A hybrid between the mortgage backed securities and the mortgage pass through securities. It is a hybrid security with issued against a mortgage pool. A mortgage pay through is also considered the debt obligation to the issuer.
- Mortgage Pass-Through Security: It is a purchase of shares of a pool or collections of mortgages. The cash flow from the pass through is to the security holder as monthly payments. More in a secondary market situation.
- Collateralized Mortgage Obligations: It is bundled mortgages sold as an investment by others. Organized and characteristic by risk levels.
I would like to have mortgage backed security if the property is considered highly valuable in term of future market cost. This is riskier if a single property over a diversified pool more like the three others. The pass through entities that have a pool of bundle attached usually have less risks than a single mortgage backed security due to diversification. If an entire zip code appears to be in excellent condition, it might be a good idea to have the pool of less risky and secondary market investor with lower potential returns in exchange.
https://realtytimes.com/advicefromtheexpert/item/1004574-mortgage-pay-through-bonds#:~:text=Mortgage%20pay%2Dthrough%20bonds%20are%20usually%20issued%20against%20a%20mortgage%20pool.&text=The%20issuer%20retains%20the%20ownership,the%20pool%20and%20simple%20amortization (Links to an external site.).
https://www.nasdaq.com/glossary/m/mortgage-pass-through-security (Links to an external site.)
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