LeoGlossary: Mortgage-Backed Security (MBS)
An asset-backed security that is backed with a mortgage or a group of mortgages. The investment is secured by a collection of mortgages acquired from the banks or financial institutions that issued them. They are bought and sold on the bond market.
Investors in MBS are essentially lending money to home buyers.
Mortgages are aggregated and sold to a government entity or investment bank. The loans are then securitized, packaged, and sold to investors as securities. The bonds can be sold as residential or commercial, depending upon what type of real estate the mortgages are tied to that make up the bonds.
These are often "pass through" assets. That means that all payments, both principal and interest, from the homeowner pass through the banks and go to the holders of the MBS. This can get more complicated in the case of pools of MBS.
Mortgage bonds and MBS differ in the fact that the latter is made up of pieces from many mortgages. These are issued tranches, each with a separate repayment schedule along with varying credit risk. Tranches of lower priority, higher interest tend to be repackaged and sold against as collateralized debt obligation (CDOs).
Another difference is that a bond will maintain its face value throughout its life. With a MBS, since payments are made either monthly or quarterly, there is on one-time payment to cash out like with a bond. This means the face value of the MBS is constantly declining with the passage of time.
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