An investment in which the purchaser is buying a slice of a pool of mortgage loans.
For example: Suppose a bank issues ten mortgages. For each mortgage, the bank gives money to the borrower in exchange for an I.O.U. worth the amount of the loan, plus interest payments. Then, these I.O.U.s are pooled together and sliced up so that if there are ten investors, each investor might own 10% of ten different mortgages, (rather then each investor owning one whole mortgage). This is done primarily to spread around the risk of default. In this example suppose there is 1 borrower who defaults: each investor will lose 10% of their security. If the loans had not been pooled and sliced, the investor who held the defaulting mortgage would get nothing, while the other 9 investors would be paid in full.
Definition from Nolo’s Plain-English Law Dictionary
A kind of investment backed by mortgage loans that have been packaged into pools in the secondary mortgage market. Payments on the mortgages generate the return on investment for the people who invest in these securities.
Definition provided by Nolo’s Plain-English Law Dictionary.
August 19, 2010, 5:20 pm