Ask the Experts is an interactive section where readers can ask direct questions to the experts at Kaulkin Ginsberg, the leading strategic advisors to the ARM industry -- and a sister company of insideARM.com -- as well as other seasoned industry executives.

Question: Can the debts that “back” mortgage backed securities be sold individually?

Answer: (from David Lavine, Director at Kaulkin Ginsberg)

This question requires some explanation of the actual structure of these financial instruments. A mortgage-backed security (MBS) is an asset-backed security or debt obligation that represents a claim on the cash flows from mortgage loans, most commonly on residential property. Commercial Mortgage-backed securities (CMBS) are secured by commercial and multifamily properties. First, mortgage loans are purchased from banks, mortgage companies, and other originators. Then, these loans are assembled into pools. This is done by government agencies, government-sponsored enterprises such as Ginnie Mae, Fannie Mae and Freddie Mac and private entities.

Mortgage-backed securities represent claims on the principal and payments on the loans in the pool, accomplished thru securitization. These securities are usually sold as bonds, but in recent years creative marketing has created a variety of securities that derive their ultimate value from mortgage pools. The asset-backed security itself is a financial instrument whose value and income payments are sourced from and collateralized (or “backed”) by a specific pool or group of underlying assets. These assets are typically individually small and illiquid and are pooled together to allow them to be sold to general investors.  

Usually, a special purpose vehicle (SPV) is created to process the securitization of asset-backed securities.  The SPV creates the securities, markets and sells them, applies the proceeds to fund the acquisition of the individual assets and is responsible for the grouping of the underlying individual assets into the pool in question.  Once created, the individual assets are unable to be sold individually.

David Lavine is the leading valuation expert in the credit and collection industry. He provides business valuation and expert witness/litigation services to select clients. For more information about Kaulkin Ginsberg’s services for debt buyers, contact us at hq@kaulkin.com.