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What is a Mortgage (a definition)

December 8th, 2009

I know it sounds crazy to define what a mortgage is, but this is actually an interesting read if you want to know specifically what a mortgage is and does within the financial industry.

A mortgage is a debt instrument giving conditional ownership of an asset, secured by the asset being financed. The borrower gives the lender a mortgage in exchange for the rights to use the property while the mortgage is in effect, and agrees to make regular payments of principal and interest.

The mortgage lien is the lenders security interest and is recorded in title documents in public land records. The lien is removed when the debt is paid in full. A mortgage normally involves real estate and is long-term debt, normally 25 to 30 years, but can be written for much shorter periods. In some cases mortgages are spread out over 40 years, but this practice will be in jeopardy due to the latest economic disaster in the United States with a sub prime mortgage mess.

Originally written exclusively as fixed rate fully amortizing loans, mortgages have evolved into more flexible contracts. Since the mid-1970s, the financial industries funding sources have become more volatile and market sensitive, and legislation and regulation have relaxed the prohibitions on alternative types of mortgage financing, such as variable rate and adjustable-rate mortgages.

Recent innovations in packaging of mortgage loans for resale in the secondary mortgage market to investors have helped to create a national market for mortgage lending and a wide variety of synthetic financial instruments, such as the collateralized mortgage obligation, a multiclass security consisting of several different mortgage-backed bonds that have payment characteristics quite different for the mortgages securing the bonds.

This description sounds very nice doesn’t it, but the fact is that these mortgage-backed securities have plagued the final to industry and almost brought it completely down, and sending the world into a financial tailspin as catastrophic as the Great Depression. At the time of this writing in December 2009, the world is still reeling and grappling trying to overcome a recession brought on by the subprime mortgage industry and the exotic derivatives created by extremely greedy practitioners on Wall Street.

Entry Filed under: Glossary of Terms