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Let us take into consideration the following entities that would be used during the explanation.
Bank 'B' - The Bank that is issuing mortgage loans
Customer 'C' - The person who has taken the mortgage loan from the bank
Agency 'A' - The Agency that is going to create the MBS
Investor 'I' - The person who is going to purchase the MBS
Customer 'C' approaches Bank 'B' with the request to issue a mortgage loan of Rs. 1,00,000/-. After all the scrutinizing process 'B' decides to grant a loan of Rs. 1,00,000/- to 'C'.
Agency 'A' buys the mortgage loan that was granted to 'C' at the rate of say Rs. 90,000/- and then packages it into a bunch of securities each with a face value of say Rs. 100/- each. Which means 'A' would be creating 1000 units of the MBS. These MBS units would be available for sale in the open securities market for investors to buy. Our Investor 'I' decides to buy these MBS units. He makes a payment of Rs. 1,00,000/- to 'A' and purchases the units. In many cases 'A' may opt to retain a portion of these units based on the loan mixture to generate revenue for itself.
'B' can now use this Rs. 90,000/- for granting fresh loans to other customers.
This is how a typical MBS gets created and sold in the open market.
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∙ 12y ago
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