A mortgage bond is a bond secured by a lien on real property, so if the issuer defaults the pledged property can be sold to repay bondholders. The same name is often applied to a mortgage-backed security, which is a different instrument: that one is backed by a pool of mortgage loans bought from lenders, not by a lien over real property the issuer itself owns. Which sense is meant decides what a holder actually has a claim on.
What the Pledge Does
The pledge is what separates this bond from the issuer’s unsecured debt. A secured bond has specific collateral pledged behind it: real property, equipment or other assets the issuer already owns. Default gives the bond’s holders the right to foreclose on what was pledged and apply it to their claims, while debt with no collateral behind it ranks as unsecured and is often called a debenture (SEC Office of Investor Education and Advocacy, What Are Corporate Bonds?). On a mortgage bond, the pledged collateral is real property.
The document a bond issue is made under is named by what it does, not by its cover page: the statutory term indenture reaches any mortgage, deed of trust, trust or other indenture, or similar instrument or agreement under which securities are outstanding or are to be issued, whether or not any property is pledged or mortgaged under it (15 U.S.C. 77ccc(7)). What that contract fixes, and when it has to be qualified, is in indenture.
A Mortgage-Backed Security Is Built the Other Way Around
A mortgage-backed security (MBS) is a debt obligation whose holder has a claim on the cash flows thrown off by a pool of mortgage loans, usually loans on residential property. An originating bank or mortgage company sells the loans on, a governmental, quasi-governmental or private entity gathers them into a pool, and that entity issues securities carrying claims on the principal and interest the borrowers pay (SEC, Investor.gov, Mortgage-Backed Securities and Collateralized Mortgage Obligations).
The direction of the security interest is reversed. A mortgage bond issuer pledges property it already owns, so the holder’s fallback is that property. An MBS issuer passes on payments from mortgage loans it bought, so the holder’s claim runs to those cash flows.
Where It Shows Up in a Firm’s Work
On the issuer’s side it is long-term debt, and the caption that carries it, bonds, mortgages and other long-term debt, asks for a brief indication of priority on each issue or type of obligation (17 CFR 210.5-02). That is where a secured issue is told apart from the rest of the debt. How the balance itself is measured, and what else that caption asks for, is in bonds payable, and the restrictive promises that usually travel with a secured issue are in covenants.
For a client that holds one rather than issues it, the work is classification, and the two tests that decide it are in marketable security.
Common Questions
A mortgage is the security interest, not the loan it secures. It involves the transfer of an interest in land as security for a loan or other obligation, with the mortgagor transferring that interest and the mortgagee, usually a financial institution, providing the loan (Cornell Law School, Legal Information Institute, Wex). A mortgage bond is a security sold to investors, backed either by property pledged that way or by a pool of such loans. One is a financing between a borrower and a lender over a single property; the other is an instrument many holders buy.
