Mortgage-backed Securities (MBS) are investments that represent ownership in a pool of mortgage loans, providing investors with a share of the interest and principal payments made by borrowers.
Mortgage-backed securities (MBS) are financial instruments that are created by pooling together a group of individual mortgage loans. These loans are typically residential mortgages, such as those used for purchasing homes or other real estate properties.
When a borrower takes out a mortgage loan to purchase a home, they make regular payments of principal and interest over a specified period of time. These payments are then passed on to the investors who hold the mortgage-backed securities representing ownership in that pool of loans.
Mortgage-backed securities are typically issued and sold by government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac in the United States, or by private financial institutions. These securities are often categorized into different risk levels or tranches based on the credit quality of the underlying loans.
Investors in MBS receive a share of the interest and principal payments made by the borrowers in the pool. The cash flows from the mortgage loans are distributed to the investors in accordance with the terms of the MBS. These payments can provide a steady income stream for investors.
The value and performance of mortgage-backed securities are influenced by several factors, including changes in interest rates, prepayment rates (when borrowers pay off their mortgages early), and default rates on the underlying mortgage loans. The complexity and risks associated with MBS were highlighted during the 2008 financial crisis when certain types of mortgage-backed securities experienced significant losses in value.