MBS
Mortgage-Backed Security
A bond-like instrument backed by a pool of mortgage loans, with payments derived from underlying mortgage payments.
MBS enable mortgage originators to sell loans to investors, providing liquidity to mortgage markets and enabling continued lending. Government-sponsored enterprises like Fannie Mae and Freddie Mac guarantee many MBS, while private label MBS lack government backing. MBS payments include both principal and interest components that fluctuate based on underlying mortgage payments and prepayments. They're subject to prepayment risk when borrowers refinance or pay early, affecting investor returns. MBS provide diversification across many mortgages and geographic regions. They played a central role in the 2008 financial crisis, leading to enhanced regulation and standardization. MBS remain important funding sources for mortgage markets and portfolio diversification tools for institutional investors.
Example
Ginnie Mae mortgage-backed securities, Fannie Mae MBS pools