Bundled mortgages: Are they legal? Are they evil?

Edward is a bit flummoxed by the notion of “securitized” mortgages. That’s when lots of people’s mortgages are bundled together and sold to investors.

Is that legal? Moreover, Edward wants to know if the practice contributes to housing bubbles.

These are fair questions. Securitized mortgages are one reason the global economy got knocked for a loop during the Great Recession. Once the housing market started collapsing, it threatened to take Wall Street with it.

ASK LAZ: Smart answers to consumer questions

The answers depend on your point of view. First of all, yes, it’s legal. Mortgages are like any other commodity. They can be bought and sold. They can be bundled into pools that back securities -- hence the term mortgage-backed securities.

For investors there can be considerable value in buying a piece of the mortgage market. For homeowners it shouldn’t make much difference who owns your mortgage, as long as you’re making all your payments on time.

Does the practice drive home prices higher? Could be. If the risk of a home loan is being diluted, it seems like common sense that riskier loans will follow. In such ways are bubbles born.

For more, check out today’s Ask Laz video.

If you have a consumer question, email me at [email protected] or contact me via Twitter @Davidlaz.