Definition
Mortgage-backed securities are bonds created by pooling mortgage loans and selling claims on the cash flows to investors. Homeowner payments of principal and interest pass through to MBS holders. Prepayment risk exists because homeowners can refinance, returning principal early when rates drop.
Example
A $1 million MBS might be backed by 10 mortgages. As homeowners make payments, those funds flow to MBS investors.
FAQ
What is Mortgage-Backed Security (MBS)?
A bond backed by a pool of mortgage loans.
Why is Mortgage-Backed Security (MBS) important?
Mortgage-Backed Security (MBS) helps investors evaluate fixed income and make more informed decisions.