What is Mortgage-Backed Security?
Mortgage-backed security (MBS) is a special type of investment tied to home loans. Instead of directly buying or selling mortgages, investors buy into MBSs, which are created when lenders sell batches of mortgages to aggregators. These aggregators bundle the mortgages into securities, which investors can then buy. Investors receive regular payments from the interest and principal payments made by homeowners. There are different types of MBSs, like pass-through securities and collateralized mortgage obligations, each with its complexity. MBSs are traded on the secondary market, giving investors a chance to earn money based on how well the mortgages perform.
Geeky Takeaways:
- MBSs represent investments tied to home loans, created when lenders sell batches of mortgages to aggregators who bundle them into securities for investors.
- Government initiatives, like the Federal Housing Administration (FHA) and Fannie Mae, are aimed at standardizing mortgages and enhancing housing accessibility.
- Entities like Freddie Mac and Fannie Mae purchase mortgages, bundle them into MBSs, and offer assurances of timely payments to investors.
- The financial crisis of 2007 was worsened by the increase of low-quality MBSs, leading to significant economic repercussions globally.
Table of Content
- History of Mortgage-Backed Security
- How Mortgage-Backed Security Work?
- Types of Mortgage-Backed Securities
- Role of Government in Mortgage-Backed Securities
- Mortgage-Backed Security and the Financial Crisis of 2007–2008
- Advantages of Mortgage-Backed Security
- Disadvantages of Mortgage-Backed Security
- Mortgage-Backed Security – FAQs