A 2004 article from the Washington, D.C., think tank Financial Policy Forum called mortgage securitization that the best financial innovation in the last 30 decades. On the flip side, the financial system crisis of 2007 and 2008 was partly to blame mortgage securitization by the financial companies. Whether the effects are still positive or negative, the process of mortgage securitization is an essential part of the mortgage market.
The procedure for mortgage securitization involves combining individual mortgages of similar features at a pool and promoting debt securities that draw attention in principal payments from the pool of mortgages. Securitization turns illiquid resources of individual mortgage loans into marketable securities that may be bought. Sold and traded on the secondary markets.
The securitization process enables mortgage originators to sell mortgage loans out of their books and use the money to generate additional loans. In case a mortgage originator provides a house owner a $300,000 mortgage at 6 percent. In case the loan provider keeps the mortgage, then it is going to make an origination fee of 1 percent or more and the 6% before the loan is paid off. In case the loan provider sells the loan into a mortgage pool, then it may again give the $300,000 and collect more charges. Mortgage securitization enables creditors to continue to recycle loan cash into home owners without keeping the loan assets in their books.
The largest holdings of mortgage-backed securities would be the quasi-governmental agencies, Fannie Mae, Freddie Mac and Ginnie Mae. These agencies take mortgages approved under the FHA mortgage insurance plans an pool them to mortgage-backed securities. The requirement that FHA insured mortgages conform to a specific set of guidelines enables these agencies to consolidate a high number of mortgages to every swimming, which is then divided and sold as mortgage securities. There are private financial companies that pool mortgages that do not conform to the FHA criteria and problem mortgage backed securities from these pools.
There are two types of mortgage. Mortgage pass-through securities are an immediate involvement from a specific pool’s receivables. Pass-through security owners receive monthly payments that are a proportional share of the interest and principal payments received by the pool. Pass-through securities do not have a specified maturity date, as principal payments are received with every monthly payment. Collateralized mortgage obligations–CMOs–are mortgage securities in which the mortgage pool has been carved into separate sections, or tranches. Each tranche may have its maturity date, rate of interest and credit score. Senior tranches are safer compared to subordinate tranches. The mortgage agencies dilemma mortgage securities. Personal mortgage securitization companies assembled CMO programs.
For homeowners, the securitization of mortgages means that their mortgage does not belong to one creditor. The loan is part of a pool owned by investors. A mortgage service organization is responsible for collecting mortgage payments and sending them along into the pool. For investors, the pass-through mortgage securities issued by Fannie, Freddie and Ginnie Mae are AAA rated securities that often pay a more attractive rate of interest than comparable Treasury bonds. The trade off is a lack of a fixed maturity date.