Mortgage-backed securities (MBS) are financial instruments that are created by pooling together a large number of individual residential or commercial mortgages into a single security. These securities are then sold to investors, who receive a portion of the cash flows generated by the underlying mortgage payments.
Mortgage-backed securities can be issued by government agencies, such as Fannie Mae and Freddie Mac, or by private financial institutions. They can be structured in various ways, including as pass-through securities or as collateralized mortgage obligations (CMOs), which are divided into different classes, or tranches, with varying levels of risk and return.
MBS were created to provide liquidity to the mortgage market and allow banks and other mortgage lenders to make more loans by selling the mortgages they originate to investors. They are a popular investment for those seeking income, as they offer higher yields than many other fixed-income securities. However, they also carry certain risks, including prepayment and default risk, as well as interest rate risk.
