Who owns your home?That seems like a pretty straightforward question. But the answer might not be as clear-cut as you think. A U.S. District Court judge in Cleveland tossed out 14 foreclosure cases Oct. 31 on the grounds that the bank suing to repossess the properties, Deutsche Bank National Trust Co., didn't actually own them. Deutsche Bank held debt securities that were linked to the mortgage loans on the properties, not the mortgages themselves. And the judge ruled that a security backed by a mortgage is not the same as a mortgage. ...Overall, the development of mortgage-backed securities has been a boon for Americans. By reducing the risk of writing mortgages, lenders have been encouraged to offer more loans, enabling countless people who'd previously been shut out of homeownership to get financing. As a result, we've seen an explosion in mortgage securities. In 1981, there were $367 billion of these debt instruments outstanding; by the end of last year, there were roughly $6.5 trillion. Mortgage-related securities account for nearly a quarter of today's total U.S. bond market, more than any other debt sector, including Treasuries and corporate bonds. Naturally, as the number of mortgage securities has increased, so has their complexity. There are simple "pass-through" securities, where the payments on the mortgages in a pool go directly to the investors. There are more complicated collateralized mortgage obligation securities, which essentially are bonds that carry different maturity dates and repayment rates based on the quality of the loans in each pool. Then there are "strips," or stripped mortgage securities, which intricately tear apart the loans and create separate payoffs based on the interest and principal payments generated by the pool.
(Excerpt) Read more at latimes.com ...
Mortgage-backed securities (MBS) are debt obligations that represent claims to the cash flows from pools of mortgage loans, most commonly on residential property. Mortgage loans are purchased from banks, mortgage companies, and other originators and then assembled into pools by a governmental, quasi-governmental, or private entity. The entity then issues securities that represent claims on the principal and interest payments made by borrowers on the loans in the pool, a process known as securitization. Most MBSs are issued by the Government National Mortgage Association (Ginnie Mae), a U.S. government agency, or the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), U.S. government-sponsored enterprises. Ginnie Mae, backed by the full faith and credit of the U.S. government, guarantees that investors receive timely payments. Fannie Mae and Freddie Mac also provide certain guarantees and, while not backed by the full faith and credit of the U.S. government, have special authority to borrow from the U.S. Treasury. Some private institutions, such as brokerage firms, banks, and homebuilders, also securitize mortgages, known as "private-label" mortgage securities. Mortgage-backed securities exhibit a variety of structures. The most basic types are pass-through participation certificates, which entitle the holder to a pro-rata share of all principal and interest payments made on the pool of loan assets. More complicated MBSs, known as collaterized mortgage obligations or mortgage derivatives, may be designed to protect investors from or expose investors to various types of risk. An important risk with regard to residential mortgages involves prepayments, typically because homeowners refinance when interest rates fall. Absent protection, such prepayments would return principal to investors precisely when their options for reinvesting those funds may be relatively unattractive.
You can learn more about mortgage securities by visiting the website of The Securities Industry and Financial Markets Association.
