Mortgage-Backed Securities: Products, Structuring, and Analytical Techniques

OVERVIEW OF MORTGAGES

In general, a mortgage is a loan that is secured by underlying assets that can be repossessed in the event of default. For the purposes of this book, a mortgage is defined as a loan made to the owner of a 1-4 family residential dwelling and secured by the underlying property (both the land and the structure or “improvement”). After issuance, loans must be managed (or serviced) by units that, for a fee, collect payments from borrowers and pass them on to investors. Servicers are also responsible for interfacing with borrowers if they become delinquent on their payments, and also manage the disposition of the loan and the underlying property if the loan goes into foreclosure.

Key Attributes that Define Mortgages

There are a number of key attributes that define the instruments in question that can be characterized by the following dimensions:

• Lien status, original loan term

• Credit classification

• Interest rate type

• Amortization type

• Credit guarantees

• Loan balances

• Prepayments and prepayment penalties

We discuss each below.

Lien Status

The lien status dictates the loan’s seniority in the event of the forced liquidation of the property due to default by the obligor. A first lien implies that a creditor would have first call on the proceeds of the liquidation of the property if it were to be repossessed. Borrowers often utilize second lien or junior loans as a means of liquefying the value of a home for the purpose of expenditures such as ...