Posted by Kelly Chung on January 7, 2009
A mortgage loan is a loan which is secured by the collateral of a specified real estate property. The real estate pledged with a mortgage can be dived into two categories: residential and non-residential. Mortgage securities represent an ownership interest in mortgage loans made by financial institutions, for example, commercial banks or mortgage companies to finance the borrower’s purchase of a home or real estate. As the underlying mortgage loans are paid off by the homeowners, the investors receive payments of interest and principal. Residential properties include houses, condominiums, cooperatives, and apartments. Non-residential properties include commercial and farm properties. The majority of mortgage securities are issued by an agency of the U.S. government i.e. Ginnie Mae, or by government-sponsored enterprises i.e. Fannie Mae and Freddie Mac.
Mortgage securities are often priced at a higher yield than US Treasury and corporate bonds. These securities may be sold at par, or at a premium or a discount to their face value. Their prices fluctuate in response to changing interest rates: when interest rates fall, prices rise, and vice verse.
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