Mortgage Backed Bonds (MBB)

Mortgage backed bonds (MBB) are essentially a bond that is backed by an asset. Your cash-flow is backed by the principal and the interest payments that are made on the mortgage. Payments are based on the details of the loan agreement. This is usually monthly installments during the full term of the loan period.

Mortgage Backed Bond (MBB) Basics

In America, residential borrowers are usually allowed to pay more then the monthly payment amount at any time. This newly adjusts the figure of the loan. Borrowers are also allowed to prematurely pay-off their entire mortgage. Both of these will alter the remaining loan principal. This makes it difficult to foretell the cash-flow of mortgage backed bonds and here is where the uncertainty in mortgage backed bonds (MBB) lie. This uncertainty is what adds extra risk for the investor hoping to buy a mortgage backed bond.

There are also commercial mortgage backed bonds which are secured by commercial properties (e.g. office buildings, apartment buildings, industrial properties and colleges among other commercial sites.) The characteristics of theses mortgages differ ranging from short-term loans (one to three years) to longer-term loans (five years and above).

The longer term loans will more likely have restriction on payments whereas the short term loans are payable freely similar to residential mortgages.

2007 figures estimate the outstanding U.S. Mortgage Backed Bond (MBB) market to be around seven trillion dollars. This figure is larger then the Treasury notes and Bonds market and has been this way since the start of this decade.

The mortgage backed bond market is very liquid. This means that investors who wish to take a position don’t have to personally try and determine the value of a bond. The prices will be quoted at fair value and they will be a very small spread on the sale.

There are a few advantages to the mortgage backed bond market. Besides speculation a lot of investors enter to hedge against a pre-anticipated drop in interest rates or aggressive lending activities.

Type of Mortgage Backed Bonds

There are a few types of mortgage backed bonds. This include “Pass-through” mortgage backed bond. It is essentially securing a mortgage payment to the mortgage starters. In this there are the residential and commercial type mortgage backed bonds.

There are collateralized mortgage obligation bonds. These are separated into groups such as repayment period and each group will be sold as a separate bond.

There are stripped mortgage backed where each mortgage installment partly covers both the interest and principal. So the bonds can be split into two types. One is the Interest only stripped mortgage backed bond where the bond is backed by the payments on the interest only. Whereas the principal-only stripped mortgage backed bond is backed by the component of the installments that pays off the principal on the mortgage.

There are also categorizations of mortgage backed bonds based on the quality of the mortgages. Prime bonds are limited to prime mortgages. Those who have full documentation like income verification and proof of asset. Borrower’s good credit is also a factor. Alt-A is the next level, it is generally prime borrowers who non-conform in a certain way. The lowest are subprime borrowers who have low credit and no supporting verification of a steady income and underlying assets.

http://www.investopedia.com/terms/m/mortgage_bond.asp
http://www.wisegeek.com/what-is-a-mortgage-bond.htm
http://en.wikipedia.org/wiki/Mortgage-backed_security