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What many people do not know is that there is a relationship between mortgage backed securities and this is one of the reasons that contributed to the rapid growth of the real estate industry in the US.
When we talk about mortgage backed security, what we actually mean is a bond. Many investors in the US purchase interests in a mortgage security, and the monthly mortgage payments made by the home buyer is the revenue that the investor earns. However, unlike a bond, the mortgage value fluctuates because there is a possibility of paying it off early. For instance, a 10-year bond will only mature after 10 years, but a 10-year mortgage can be paid off at any time by either refinancing or paying outright money.
Mortgage backed securities are issued by retail lenders. These are the same lenders that give mortgages to borrowers. The reason is that the retail lenders want more liquid money to use for other purposes. They sell securities on the secondary market and the properties are the collateral for the securities. This means that the mortgage lender is getting a loan from investors by using the mortgage and the property as guarantee of payment.
Many people might find the idea a little bit suspect but the fact of the matter is that mortgage and bond market have been functioning together in the US for a long time. Government entities like Ginnie Mae have been quite active in the secondary mortgage market.
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