How Do Mortgage Backed Securities Work?

Video Transcript

"Hello, my name is Mark Griffith, and this is a brief introduction to mortgage backed securities. How do they work? What are they? Mortgage backed securities are essentially a way of packaging several different mortgages into one instrument. And what happens is that you effectively buy parts of other peoples mortgages, and they're repaying their mortgages to you. This, therefore, is a good way to convert a fixed sum of money into a stream of income that you'll receive. Again, the devil is in the details, so you need to consider are these fixed rate mortgages, are they variable rate mortgages, and are they backed. For example, are they backed by the government? What's the risk of defaulting? They have names like Ginnie Mae, Freddie Mac, and they sound quite homely, but the important details are the same as with any other financial institution. How likely is the default? What stage are you in the property or real estate investment cycle? Are interest rates going up or going down? This will also affect the value of the payments you receive. And what are the terms under which you receive them? So, remember to do your homework, and remember to think clearly about what it is you want. What kind of payments you want, over what period, with what risk of default. Do you want the payments to be variable? Do you want them to be fixed? They are effectively bunches or parcels of mortgages, which have been bought off the original lender, and you have now become the lender. You buy that risk, and you are receiving a stream of income in return. And like anything, the phrase safe as houses is deceptive. Some houses are safe, some aren't, and mortgages based on houses can be safe, or sometimes they can be risky. So, look at he detail. Once you've decided what you want, how you're going to do it, what terms, what kind of risk you're willing to accept, off you go. This is a way of turning fixed sums of money into streams of income. Good luck."