I just can’t wrap my mind around this.
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What is a mortgage?
A mortgage is an agreement between a person buying a house and someone else (usually a bank).
The person buying the house doesn’t have the money to buy it completely, so they promise to give the bank money over time. And if they fail to do that, they have to give the bank the house.
So, a mortgage is a promise of “I will, over time, pay you $X – or if I fail to do that, I’ll give you this house.” This is a promise with collateral; the collateral is the house. A mortgage is kind of like a “house-backed security”.
The bank can sell that promise. The home-buyer still pays the same $X, but pays it to a different bank or other entity.
The next step is that the bank can use the mortgage as collateral. The bank now tells someone else, “I will pay you $Y – or if I fail to do that, I’ll give you this mortgage.” This is a “mortgage-backed security”.
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