Definition of mortgage bonds

tax-exempt securities sold by municipal and state authorities for the purpose of providing low-interest rate mortgage loans to qualified individuals. For most programs, mortgage borrowers must be first-time home buyers with moderate income.

Example: Local Housing Finance Agency, a creation of the city of Local, sold $50 million of mortgage bonds. The proceeds from the sale were used to originate loans through local mortgage lenders for first-time home buyers within the city. Interest on the bonds was tax-exempt to the bondholders, thereby allowing the agency to borrow money at an interest rate below 6%. The mortgage loans could be originated at rates below 7% at a time when market mortgage interest rates were above 8%.