A friend told me that when one gets a mortgage from the bank, the bank does not hold the deed. I found this hard to believe, but after closer inspection, I realized that this is more complicated than I first thought.
The stock market is known as the place where people can buy and/or sell stocks and/or bonds. When one buys a stock, one buys a piece of the company. When one buys a bond, one lends the company money. Furthermore, bonds comes in two main types. Asset-backed (secured) and unsecured bonds.
When one purchases a bond that is asset-backed (secured), it has collateral attached to it in case of default. This collateral can be anything that has value. Therefore, in the case of mortgage-backed bonds, the bonds are backed by the mortgages taken out by the people who taken out a mortgage to purchase a home. Therefore, the bank, who uses the mortgages as collateral, sells the mortgage-backed bonds in the market to raise capital (cash) with the promise of paying the principal borrowed plus interest on the mortgage-backed bonds.
In Canada, banks have been selling mortgage-backed bonds. Therefore, bonds sold by institutions that offer mortgages that have a maturity date of 10, 15, 20, 25, 30 years are most likely mortgage-backed bonds. Although, as of February 5, 2012, the risk of the CHMC collapsing is low.
In any case, if Canada’s housing market collapses, I am sure you know who will be left footing the bill.
The Canadian government owned CHMC, that insures Canadian mortgages, is reaching the $600 billion mark at http://www.cbc.ca/news/business/story/2012/02/02/flaherty-mortgage-cmhc.html
CMHC’s, Canadian Mortgage and Housing Corporation, article about the mortgage-backed bonds can be read at http://www.cmhc-schl.gc.ca/en/hoficlincl/in/camobo/loader.cfm?url=/commonspot/security/getfile.cfm&PageID=54142
After the sub-prime mortgage crisis in the US, I am pretty sure many investors are thinking twice before buying mortgage-backed bonds.