Mortgage bonds
Briefly, mortgage bond is a debt instrument issued by a corporation and secured by real estate owned by the corporation (such as factories or office buildings). Others may say it in njust a few words: ... (mortgage bond is) a bond secured by a mortgage on a property.However, a somewhat longer description would be that "mortgage bonds are backed by real estate or physical equipment that can be liquidated. These are usually considered high-grade, safe investments. If an issuer in default has both secured and unsecured bonds outstanding, secured bondholders are paid off first, then unsecured bondholders. Naturally, because unsecured bonds carry greater risk than secured bonds, they usually pay higher yields." The perfect example are Croatian government bonds, we might add.
On the other hand, here is how Swedish deal with it: "(a mortgage bond) is a promissory note issued by a mortgage institution, for instance, Spintab, SEB Bolĺn, Stadshypotek or NB Hypotek which are all owned by banks, or by SBAB, which is owned by the Swedish government. By issuing mortgage bonds the mortgage institutions finance their long-term home mortgage lending." Obviously, in this case, mortgage bonds isued by SBAB (stands for Sveriges Bostadsfinansieringsaktiebolag) can be considered as Swedish government bonds.
Now, it is not always plain old mortgage bond. There is more to it, but basics first. There are sometimes several mortgages placed upon the same property. The one having the prior claim to or preference over the others is known as the first mortgage. Obviously, there is also a second mortgage, a mortgage placed upon property which already has another mortgage existing upon it. For example, a certain piece of real estate supposed to be worth $10,000 has already existing upon it a mortgage for $5,000; the owner wishes to borrow $2,000 more, and finds some one who is willing to accept a second mortgage, upon the same, for that amount, making the total mortgage indebtedness against the property $7,000. Sure, there is certain risk involved here and when taking a second mortgage one should have reason to believe that the property will, at any time during the life of his mortgage, bring at forced sale a price sufficient to pay off both mortgages, because the first mortgage must be satisfied in full before the second mortgage holder receives anything.
The first and second mortgage described in the previous paragraph are necessary intro for the First Mortgage Trust Bond (FMTB) concept. FMTB is a form of a collateral trust bond and by which it will be seen that under certain conditions a bond of this nature may be indirectly a first mortgage. So, a FMTB is secured by a deposit of other bonds which are in themselves secured by a first mortgage.
Althought bonds are usually seen as low-risk investments, there is still some risk involved. There are some safeguard measures protecting the investment in mortgage bonds against credit risk. The outset of the discussion is the 200-year old Danish system of mortgage credit where investor protection primarily has been achieved by ensuring the quality of the mortgage credit institutions' balance sheets. The safeguard measures used focus on the relative and absolute size of the capital base of the mortgage credit institutions and the minimisation of interest rate and credit risk borne by the institutions. Enough said.
In almost all cases, the interest rate of a loan is lower if the loan is secured by collateral. Since bond isuers (corporations, governments, etc.) want to pay the lowest interest rate possible on their bonds, they frequently secure the bond payments with collateral. In fact, corporate bonds can be classified according to the type of collateral that they provide. Many of these bonds are also insured to lower the interest rate even more.
Having that in mind, a mortgage bond provides the bondholders with a first lien on corporate property. A lien, in this case, gives the bondholders the right to sell the property if the corporation defaults on its payments. Mortgage bonds are often issued as a means of continuous financing and expansion because it is cheaper than issuing new stock, and ownership interest is not diluted. More often than not, mortgage bonds are issued as a series of bonds that have the same indenture and have the same claim to property as a collateral. As each issue matures, another issue based on the same mortgage is issued. If some property is sold or released from the mortgage, either other property is substituted or some bonds are retired to maintain the adequacy of the collateral.
When it comes to securing mortgage bonds, there often are some common indenture provisions designed to protect the bondholders. For example the after-acquired clause which stipulates that property acquired after the first lien will also be subject to the lien. Too complicated financial mumbo-jumbo? Maybe bond and bonds glossary can be of assistance. Also, any additional issues cannot be more than 60% of the secured property value acquired after the first lien. Well, one way or another, this is all about ...