Essay Implementing The Mortgage Backed Security

1287 Words Dec 1st, 2014 6 Pages
It is the way to the small regional bank to lend the mortgage to the customers without having the tension that whether the borrower will be able to repay the loan or not. There is a role of bank to act as an intermediary between the investment markets and the homebuyer. This type of security is used to give the principal payments and interest from the pool of mortgage to the shareholders. These types of securities are issues and guaranteed by Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (Freddie Mac), Government National Mortgage Association (GNMA), etc. (http://www.sec.gov, 2014). Mortgage Securities are traded in terms of average life rather than the maturity dates like other kind of securities.
Creation of Mortgage Backed Security
The steps involved in creating the mortgage-backed security are as follows. In the first step, the lender of the mortgage extends the loan to the homebuyer. The mortgage is then sold by the lender to the government sponsored enterprises like Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (Freddie Mac), Government National Mortgage Association (GNMA), etc. or the private home agency or a bank. The lender services the mortgage as it has to do, and this process is unknown to the homebuyer. The private entity to the bank takes few numbers of loans and put them into a pool (http://www.sec.gov, 2014). There can by any number of loans in a pool, i.e. from few loans to the…

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