With the recent credit crisis, there has been a lot of discussion about mortgage-backed securities, which have said to be a major cause of the crisis. But who really knows what mortgage-backed securities are? That definition usually is not provided adequately and clearly, if it is provided at all.

A mortgage-backed security is ?an asset-backed security whose cash flows are backed by the principal and interest payments of a set of mortgage loans.? In other words, a mortgage-backed security is an investment that provides returns from the payments made to pay off mortgages. There are a few types of mortgage-backed securities, including:

• Pass-through mortgage-backed securities
• Collateralized mortgage obligation
• Stripped mortgage-backed securities

Additionally, the first and last of these three types of mortgage-backed securities can be divided into subclasses.

There are many risks associated with mortgage-backed securities. Some include:

• Unemployment
• Changes in laws
• Home price inflation
• Economic growth (which leads to higher turnover in the housing market)
• Demographic changes

Additionally, there is a credit risk, which hinges upon whether or not the individual who took out the mortgage can make her payments on time or not.

What has happened in the current credit crisis is that a lot of large banks, such Fannie Mae, Freddie Mac, and Wachovia, gave out too many risky loans. That is, they allowed high-risk individuals?individuals who very likely would not have been able to pay off their mortgages?to take mortgages.

Unfortunately, many people defaulted on their home loans and their homes had to be foreclosed. In turn, investment banks, such as Goldman Sachs and Lehman Brothers, which invested heavily in mortgage-backed securities, suffered seriously.

Contact Us

If you would like to find out more information about mortgage-backed securities or about what hard money can do for you in the current credit crisis, contact the experts at Pitbull Mortgage School by calling 858-736-7788.