Mortgage securitization is the process of bundling many mortgages into a pool, and then selling shares of that pool as bonds. If the mortgages in the pools are paid on time, then the interest payments are profits shared by all of the bond-holders. The bonds themselves have different classes depending on their level of risk and the amount of profit they are paid. In most cases, when a specific bond is paid a profit is based on its class. The management of these security pools is handled by mortgage security trusts.
A typical mortgage security trust involves several parties. The parties and their respective duties are defined by a document called the Pooling and Servicing Agreement (PSA). At the beginning of the chain is your original lender. This could be a small mortgage lender or a major bank. In securitization terms, this person is called the Seller. The Seller originates the loan and then sells it, for value, to another entity called the Sponsor.
The Sponsor then sells the loan, for value, to a third entity called the Depositor. The Depositor then transfers the loan into the trust. This chain is necessary because mortgage-backed securities must be "bankruptcy remote." If the original lender goes bankrupt, the subsequent sales of the loan insulate it from being repossessed by a bankruptcy trustee. A typical PSA requires that each stage of this process is documented in writing and that the original documents all make it into the trust before its closing date.
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