Mortgage bonds are a type of securities. They have long been popular abroad, but are still little known in Russia. However, recently the situation has begun to change radically. So, mortgage bonds provide income by financing the housing lending market. Banks, issuing securities, attract funds. Then they give out loans to the population, receive profit at the expense of interest and partially share it with investors. Everything seems pretty complicated. Let's find out more about mortgage bonds.
How is everything arranged?
To better understand how you can earn, you need to understand the principles of functioning.
So, first the bank issues mortgage bonds for a certain amount, then sells them among future holders.
The latter, in turn, acquire the right to claim, which is secured by real estate. It is pledged to the bank until the borrower makes the full loan amount. This is why mortgage-backed bonds are considered a relatively safe way to invest.
If the borrower does not make payments, repaying the loan, the bank will be able to sell the collateral to repay the debt.
Who issues mortgage bonds?
There are two types of organizations, each of which can perform this action:
- Credit institutions.
- Mortgage Agents.
There are significant differences between them, so you should talk about each separately.
Credit organizations
In order to be able to issue mortgage bonds, they must meet certain requirements. In short, a credit institution should not have financial problems.
Sometimes in practice there are situations when the organization does not comply with the rules, there is an alternative. It is about creating a mortgage agent. This implies a different scheme for issuing securities.
Mortgage agent
It is a legal entity that creates a bank solely for the sole purpose. This refers to the issue of mortgage bonds.
It is the agent who receives the claim rights secured by the securities.
You need to understand that the activities of such an organization must be subject to a number of restrictions. For example, one institution will manage a mortgage agent, and accounting will be completely different. Moreover, the agent does not have the right to hire employees.
Such measures pursue a common goal - to increase the transparency of activities and minimize legal disputes.
Features
Mortgage bonds are issued in order to quickly attract financial resources by the bank. Having received funds from investors, a credit organization issues a loan. Interest earned is her profit.
How reliable are loan mortgage bonds? The answer to this question is interesting to many potential investors. After all, they want to increase their own investments without risk.
You need to understand that the obligations of the bank to bondholders are secured by the right to demand mortgage loans. They are called assets and cannot be alienated in favor of other claims. That is why a collateral registry has been created that takes into account mortgage bonds. This document makes all actions more transparent.
Mortgage bonds in Russia are completely unpopular and few people know. This market is in an undeveloped state, and for the current period its prospects are very vague.
Bankruptcy
Potential investors must be prepared for unpredictable scenarios. Consider one of them. If the bank that issued mortgage bonds to the market is declared bankrupt, then the bankruptcy trustee enters the case. He sells collateral, and pays the proceeds to bondholders. Such actions must be completed within nine months from the date of bankruptcy.
Depending on the amount received after the sale of the collateral, two scenarios are possible.
- If the funds were not enough to pay the bondholders, they can take a place in the line of creditors and wait for the receipt of debts after the sale of the remaining property.
- If the funds are in excess, then after payment to the holders of mortgage bonds, they are sent to meet the requirements of creditors.
Prepayment
Bankruptcy is not the only possible scenario. In some cases, bondholders require early repayment. This is possible in the following situations:
- Default An example is the situation when a bank does not pay income to holders on time.
- Mistakes in the registry of mortgage coverage.
- Failure to comply with the rules of activity. This item is more relevant to the mortgage agent. If he violates the relevant law, bondholders are entitled to demand early repayment.
Benefits
When using mortgage bonds, each party is in the gain. There are advantages for the bank, and for the borrower, and for the investor:
- A credit institution makes more transactions by attracting additional funds. As a result, income from interest received increases.
- When an investor acquires mortgage bonds, he receives a relatively reliable financial instrument that allows not only to save, but also to increase his own funds. It is curious that the rate on such securities is lower than on loans issued for the purchase of real estate. However, an investor can rely on profits by raising prices in the housing market.
- For a borrower, mortgage bonds may be an opportunity to get a better loan rate. This is due to the fact that banks, issuing bonds, will receive more funds, increase the number of transactions and, accordingly, their own profit. In the future, this will reduce high mortgage rates. Even one or one and a half, or even two percent, will allow borrowers to obtain impressive savings by purchasing housing.
Types of Mortgage Bonds
To better understand the market for these securities, you need to understand their types:
- Mortgage bonds. They are debt securities. They are fully or partially secured by collateral. This means that the holder has the right to demand the return of his own funds at the expense of collateral for the loan. Only a bank or special agent can issue mortgage bonds.
- Mortgage certificate of participation. This is a type of registered security. He has no face value, and the holder receives the right to a share of the property that makes up the total coverage.
- Mortgage. This is another type of securities. This is a kind of guarantee of the fulfillment of financial obligations provided by real estate.
How are things in Russia?
The mortgage bond market in this country has its own characteristics. And there are a lot of them.
Most likely, it will not work to borrow foreign experience. After all, if we talk about the Russian bond and real estate markets, neither one nor the other can be called stable. That is why potential investors are in no hurry to invest in this unverified financial instrument. Instability is one of the main reasons that prevents mortgage bonds from becoming popular in Russia.
The next reason is the high cost.This leads to the fact that private investors cannot afford to buy bonds, not to mention ordinary Russian citizens who are far from the stock market, but do not mind considering a reliable alternative to bank deposits.
That is why the main target audience for such securities is NPFs, as well as insurance and banking organizations. They have impressive financial sums and an even greater desire to increase them. If mortgage bonds become popular and accessible to ordinary citizens, the yield on securities will decrease slightly.
The final reason can be called imperfect legislation.
Prospects
So far, the mortgage bond market in Russia can be called a rather crude idea, which does not give any guarantees for the preservation of capital. However, it is not known how the situation with securities will develop in the future.
Some experts are very optimistic. They believe that the mortgage bond market in Russia is just beginning to take shape, so the attractiveness of such investments is now maximum.
Due to the fact that housing lending in the country is already developed without attracting securities, it will take a lot of time to change the situation. According to all the same experts, this period can stretch for seven to ten years. In the meantime, the prospects for mortgage bonds remain rather vague.
At the same time, the market for such securities is considered attractive for both banks and investors. Mortgage bonds allow credit institutions to attract additional financing. Investors are given the opportunity to contribute to a profitable project and increase their equity.
Studying the securities market, in particular, mortgage bonds, you need to collect as much information as possible. After weighing all the data, a potential investor will be able to make their own decision.
