What Is a Mortgage Backed Security?

What Is a Mortgage Backed Security?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

A Mortgage Backed Security (MBS) is a financial product that is secured by a mortgage or collection of mortgages. Investors buy these securities, while money from the purchase provides capital to the entity – like a bank, housing agency, or other type of lender – that originally issued the mortgage. The lender can use this capital to issue new loans, while investors typically receive periodic interest and principal payments from the underlying mortgage.

Related Questions

1. How does a Mortgage Backed Security work?

An MBS operates by pooling a group of mortgages together. These mortgages are packaged and sold to investors as securities. The investor then receives regular payments from the mortgage interest and paid principal that borrowers put in.

2. What are the benefits of Mortgage Backed Securities?

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Benefits for investors can include a steady income stream from interest and principal payments. For lending institutions, packaging mortgages as securities can free up capital, allowing them to issue new loans.

3. Are there risks associated with Mortgage Backed Securities?

Yes, risks can include the possibility of borrowers defaulting on their mortgages or pre-payment which changes the flow of income for investors.

4. Who invests in Mortgage Backed Securities?

MBS are often bought by institutional investors like pension funds, mutual funds, insurance companies, as well as individual investors.

5. How are Mortgage Backed Securities regulated?

Securities and Exchange Commission (SEC), The Federal Reserve as well as other government and quasi-government agencies provide regulations and oversee the MBS industry.