A mortgage is a loan that is secured by real estate. Mortgages are typically used to finance the purchase of a home, but they can also be used to finance other types of real estate investments.
Mortgages are securitised by pooling together a number of mortgages and then issuing securities that represent ownership interests in the pool. The securities are typically divided into tranches, with each tranche having a different level of risk. The most senior tranches have the lowest risk, as they are the first to receive payments in the event of a default. The most junior tranches have the highest risk, as they are the last to receive payments in the event of a default.
Mortgages are a popular asset for securitisation because they are relatively stable and predictable. The payments on mortgages are typically fixed, and the underlying real estate assets can provide some protection against default.
Here are some of the applications of mortgages in the context of securitisation:
- Raising capital: Mortgages can be used to raise capital for financial institutions. This can be helpful for financial institutions that are looking to expand their lending activities.
- Diversifying risk: Mortgages can be used to diversify risk for investors. This is because the payments from the pool of mortgages are spread out over a number of different borrowers.
- Liquidity: Mortgages can be used to improve liquidity in the mortgage market. This is because they make it easier for investors to buy and sell mortgage-backed securities.
Overall, mortgages are a valuable asset for securitisation. They can help to raise capital, diversify risk, and improve liquidity.