Mortgage-backed securities (MBS) are debt obligations that represent ownership of an undivided interest in a group of mortgages. Mortgage loans are bought from banks, mortgage companies and other loan originators, and then assembled into pools by various government or private entities. The entities subsequently issue securities, which are then purchased by private investors, that represent claims on the principal and interest payments made by borrowers on the loans that comprise the pool, a process known as securitization.

Most mortgage-backed securities are issued by Ginnie Mae (the Government National Mortgage Association), Fannie Mae (the Federal National Mortgage Association) or Freddie Mac (the Federal Home Loan Mortgage Corporation), all U.S. government-sponsored enterprises. MBS from Ginnie Mae are backed by the full faith and credit of the United States, which guarantees that investors receive full and timely payments of principal and interest. Fannie Mae and Freddie Mac MBS are not backed by the full faith and credit of the U.S. government, but both have special authority to borrow from the U.S Treasury if necessary. Other private institutions, including brokerage firms, banks and homebuilders securitize mortgages; these products are known as "private-label" mortgage securities.

Mortgage-backed securities can be purchased at most full-service brokerage firms and some discount brokers. The minimum investment is typically $25,000; however, there are some MBS variations (collateralized mortgage obligations, or CMOs) that can be purchased for less than $5,000. Investors who don't want to invest directly in a mortgage-backed security but who want exposure to the mortgage market may consider mortgage funds - exchanged-traded funds (ETFs) that invest in mortgage-backed securities. Examples include SPDR Barclays Mortgage Backed Bond ETF (MBG); iShares MBS ETF (MBB), and Vanguard Mortgage-Backed Securities Index ETF (VMBS). ETFs trade just like stocks on regulated exchanges, and can be sold short and purchased on margin. And, like stocks, ETF prices fluctuate throughout each trading session in response to market events and investor activity.

  1. Are mortgage-backed securities backed by any guarantees?

    Actually, any mortgage-backed security (MBS) guarantee depends on who issued it.To review, an MBS is a security, created ... Read Answer >>
  2. What is securitization?

    Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming ... Read Answer >>
  3. Why do MBS (mortgage-backed securities) still exist if they created so much trouble ...

    Read several different arguments in favor of allowing the trade of mortgage-backed securities, even after the financial crisis ... Read Answer >>
  4. What's the difference between a collateralized mortgage obligation (CMO) and a mortgage-backed ...

    Find out more about collateralized mortgage obligations and mortgage-backed securities and the difference between the two ... Read Answer >>
  5. How does Fannie Mae (FNMA) make money?

    Fannie Mae is a government-sponsored enterprise (GSE) established in 1938 to expand the flow of mortgage money by creating ... Read Answer >>
  6. What role did securitization play in the U.S. subprime mortgage crisis?

    Learn how the securitization of sub-prime mortgages into asset-backed securities fueled the real estate market crash in 2 ... Read Answer >>
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  1. Mortgage Pool

    A group of mortgages held in trust as collateral for the issuance ...
  2. Aggregator

    A party involved within the secondary mortgage market that purchases ...
  3. Weighted Average Coupon - WAC

    The weighted-average gross interest rates of the pool of mortgages ...
  4. Current Face

    The current par value of a mortgage-backed security (MBS). Current ...
  5. Guarantee Fees

    Fees charged by mortgage-backed securities (MBS) providers, such ...
  6. Residential Mortgage-Backed Security (RMBS)

    A type of security whose cash flows come from residential debt ...
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