Mortgage-Backed Bond

Bond collateralized by a pledge of mortgages and payable from the issuer's general funds. Because the market value of the collateral must exceed the outstanding bond principal, additional collateral may be required if the market value of the underlying mortgages declines. Unlike mortgage pass-through securities, which convey an ownership interest in a pool of mortgages, ownership of a mortgage-backed bond, and usually servicing rights, are retained by the issuer, although mortgage servicing can be sold, at a price, to a third party. Also, for tax purposes, mortgage-backed bonds are treated as issuer debt rather than as a sale of assets. Mortgage-backed bonds also have a more predictable maturity than pass-through securities, thus giving the bondholder a kind of call protection against early redemption. See also Pay-Through Security.