posted on 06-06-2019

Mortgage Bond

Updated August 11, 2020
Written By
Paul Tracy

What is a Mortgage Bond?

A mortgage bond uses a mortgaged property as collateral.

How Does a Mortgage Bond Work?

A mortgage bond is collateralized by one or several mortgaged properties. In case of default, the mortgaged properties may be sold to pay back bondholders.

For example, suppose bond ABC is backed by a mortgage on property XYZ. If bond ABC goes into default, the holders of the bond may liquidate property XYZ as compensation.

Why Does a Mortgage Bond Matter?

Mortgage bonds, unlike traditional bonds with similar characteristics, tend to have lower yields. The reason is that mortgage bonds are lower risk because the mortgaged property is pledged as collateral.