i was doing some research on the 2008 financial crisis and the term "sold mortgages" and "bundled up mortgages" keeping appearing. i'm relatively new to this subject so i cant understand how bundling up mortgages an selling them work. i think im referring to the concept of "mortgage-backed securities".. can someone please explain this to me in simple terms? thank you.
The buyer owns the rights to the cash flows that would have gone to the bank that issued the mortgage.
Say five mortgages are packaged together, with each mortgage having a monthly payment of \$2000. If you buy that package, you are entitled to the \$10000 each month that the homeowners pay, rather than those payments going to the bank that initially issued the mortgage. In exchange, you pay the bank that issues the mortgages some amount of money to have the rights to these payments instead of that bank.
If the homeowners can’t pay (which is what happened in 2008), then you’re out of luck. That’s the risk you assume with this investment.