Behind the Scenes of Your Mortgage

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A mortgage can be seen as a stream of future cash flows. These cash flows are bought, sold, stripped, tranched (as an asset in a larger investment pool of the lender) and scrutinized in the secondary mortgage market. The secondary mortgage market is extremely large and very liquid.

From the point of origination to the point at which a borrower’s monthly payment ends up with an investor as part of an mortgage-backed security (MBS), asset-backed security(ABS), collateralized mortgage obligation (CMO) or collateralized debt obligation (CDO) payment, there are several different institutions that all carve out some percentage of the initial fees and/or monthly cash flows.The Bottom Line Being  

Your mortgage will most likely get sold into the secondary mortgage market. In a matter of weeks, maybe a month, from the time a mortgage orginates it can become part of a CMO, ABS or CDO deal. Few borrowers realize the extent to which their mortgage is sliced, diced and traded. The end-user of a mortgage might be a hedge fund that makes directional interest rate bets or uses leveraged positions to exploit small relational pricing irregularities, or it might be the central bank of a foreign country that likes the credit rating of an agency MBS. On the other hand, it could be an insurance company based in Brussels, that likes the duration and convexity profile of a certain tranche in an ABS, CMO or CDO deal. The secondary mortgage market is huge, liquid and complex with several institutions that all take a slice of the mortgage pie.

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