• Mortgage bonds are designed to stimulate the commercial and residential mortgage markets by providing access to capital for the bond issuers and favorable tax treatment for bondholders. Bond issuers are typically mortgage lending institutions, and the mortgage bonds are typically purchased by larger financial institutions seeking an investment with a competitive return. While mortgage backed securities can be dangerous investments in certain situations, there are distinct advantages that can be realized by the issuance and trade of mortgage bonds.
  
  

Access to Capital

• Mortgage bonds offer the borrower the ability to tap additional sources of capital for use in the issuance of mortgages. Issuing bonds can be less complicated and costly than other popular forms of financing such as selling stock or taking commercial loans. This in turn allows the borrower to offer mortgages with more attractive rates and fee structures, stimulating the mortgage market and complementary industries such as home building, landscaping, and home furnishings.
  
  The bondholder is provided with the advantage of choosing to receive steady interest payments from the borrower or to reap additional profits by trading the mortgage bond on the open market.
  
  

Social Benefits

• The ability of bond issuers to offer more attractive mortgage loans allows a greater number of people to obtain financing for their homes and businesses. Families with financial difficulties may find it easier to obtain a reasonable mortgage loan due to the greater ability of lenders to finance the loans they provide.
  
  This advantage has proven dangerous in recent years, however, as banks have made numerous loans to borrowers with poor credit, only to realize an unprecedented rate of default.
  
  

Collateralized Assets

• Default risk factors associated with the mortgage loans underlying the issued bonds are minimized by the assets held as collateral by the lender. If the mortgage loan falls into default, the collateralized assets can be sold to minimize the loss. Common types of assets pledged as collateral include houses, vehicles, and business facilities.
  
  This advantage does not necessarily eliminate the risk of a partial loss, however, as it is possible for the underlying collateralized assets to have fallen in value compared to the loan at the time of sale.
  
  

Tax Benefits

• According to the Home Mortgage Bonds Website, first time mortgage bondholders have the advantage of deferring taxes on all bond income, including interest and principal repayment. This provides an opportunity to minimize the tax effect of a financial institution's investment, at a rate of return that is competitive with other investment vehicles.