1.2.1.3.1. Securitized Bonds and Mortgage-Backed Securities
Mortgage-backed securities (MBSs) are a type of hybrid bond known as a securitized bond. More specifically, they are debt obligations that represent claims on the cash flows from pools of mortgage loans.
If a secured bond is backed by an asset (e.g., real estate) that acts as loan collateral, a securitized bond is secured by a mortgage, a mortgage that is secured by a property. When you hold a secured bond and the issuer defaults, you can seize the secured property and sell it. You could seize a mortgage too, but you would acquire another debt, a mortgage payment for the next several years.
But suppose an issuer offers as collateral the mortgage payment from a hundred mortgages, or a thousand, or a hundred thousand, from homes all over the country? If a single home owner defaults, the others presumably will continue making their payments. Even if a whole region should suffer a market decline, the markets are thought to be uncorrelated. The rest of the country would pick up the slack. Seem like a safe bet? It is the ba