Additional Resources

  1. Reed College [reed.edu]
  2. Mortgage Backed Securities [spot.colorado.edu]
  3. Mortgages, Mortgage-backed Securities, & Asset-backed Securities [xavier.edu]
  4. Mortgage Backed Securities, Wall Street, And The Making Of A Global ... [wcl.american.edu]
  5. Presentation: Overview Of The Mortgage-backed Securities Markets [warrington.ufl.edu]
  6. Reviving The Commercial Mortgage-backed Securities Market: The ... [scholarship.sha.cornell.edu]

Definition

A mortgage-backed security is a type of asset-backed security that is secured by a mortgage or collection of mortgages. The mortgages are sold to a group of individuals that securitizes, or packages, the loans together into a security that investors can buy. The mortgages of an MBS may be residential or commercial, depending on whether it is an Agency MBS or a Non-Agency MBS; in the United States they may be issued by structures set up by government-sponsored enterprises like Fannie Mae or Freddie Mac, or they can be "private-label", issued by structures set up by investment banks. The structure of the MBS may be known as "pass-through", where the interest and principal payments from the borrower or homebuyer pass through it to the MBS holder, or it may be more complex, made up of a pool of other MBSs. Other types of MBS include collateralized mortgage obligations and collateralized debt obligations.

Mortgage Backed Securities

Mortgage-backed security (MBS) is a financial asset secured by single or a collection of mortgages. The securities provide periodic returns to investors similar to coupon payments. They are issued by an authorized or regulated financial institution.

Composition of a Mortgage Backed Security

An MBS is an asset backed security. The asset in this case is mortgage or a group of mortgages that are sold to investment banks or a government sponsored agencies such as Freddie Mac and Fannie Mae. They in turn package or securitize the securities that can be bought by investors.

MBS can be composed of either commercial or residential mortgage depending on the issuing company. Structure of the MBS differs as well and includes collateralized debt obligations (CDO) and collateralized mortgage obligations (CMO). In the latter case, the securities are structured as property mortgage investment conduits.

There is another type of MBS called as 'pass through' where the principal amount and the interest payments pass from the homeowner to the holder of the MBS. Moreover, the MBS can be complex and composed of a pool of different MBSs.

An investor that buys mortgage-backed security is basically lending money to the owner of a property. It serves as a vehicle for small banks to lend mortgages to clients without having to worry about their creditworthiness. The securities are backed by the property value in the market. In this capacity the bank simply acts as a middle man between the investment market and the home owner.

MBS is usually used as a vehicle to direct payments from the home owner to the shareholders. The payments are subdivided based on the risk of different mortgages. The net value of MBS decreases with time since unlike fixed investment instruments such as bonds, the principle of this type of financial security is not paid back in lump sum to the issuer at the maturity of the loan. Instead, the principal amount of the MBS is paid back in a series of payments along with the interest amount. As a result, the face value of MBS decreases with time, measured by the percentage of the original value that is unpaid.

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