Mortgage-Backed Security (MBS)

AAA

DEFINITION of 'Mortgage-Backed Security (MBS)'

A type of asset-backed security that is secured by a mortgage or collection of mortgages. These securities must also be grouped in one of the top two ratings as determined by a accredited credit rating agency, and usually pay periodic payments that are similar to coupon payments. Furthermore, the mortgage must have originated from a regulated and authorized financial institution.

Also known as a "mortgage-related security" or a "mortgage pass through."

INVESTOPEDIA EXPLAINS 'Mortgage-Backed Security (MBS)'

When you invest in a mortgage-backed security you are essentially lending money to a home buyer or business. An MBS is a way for a smaller regional bank to lend mortgages to its customers without having to worry about whether the customers have the assets to cover the loan. Instead, the bank acts as a middleman between the home buyer and the investment markets.

This type of security is also commonly used to redirect the interest and principal payments from the pool of mortgages to shareholders. These payments can be further broken down into different classes of securities, depending on the riskiness of different mortgages as they are classified under the MBS.

VIDEO

RELATED TERMS
  1. Collateralized Mortgage Obligation ...

    A type of mortgage-backed security in which principal repayments ...
  2. Coupon Stripping

    The separation of a bond's periodic interest payments from its ...
  3. 48-Hour Rule

    A requirement that all pooled information regarding to-be-announced ...
  4. Agency MBS Purchase

    The purchase of mortgage-backed securities issued by government-sponsored ...
  5. Single Monthly Mortality - SMM

    In mortgage-backed securities (MBSs), this is the percentage ...
  6. Participation Mortgage

    A participation mortgage is a type of mortgage that allows the ...
Related Articles
  1. Credit & Loans

    What does FNMA stand for?

    Learn what FNMA is, how it helps low-, moderate- and middle-income families afford a place to live using mortgage liquidity, and how you can invest in it.
  2. Insurance

    Fannie Mae and Freddie Mac, Boon Or Boom?

    These two companies are crucial to the mortgage market, but are they ticking timebombs?
  3. Bonds & Fixed Income

    Profit From Mortgage Debt With MBS

    Mortgage-backed securities can offer monthly income, a fixed interest rate and even government backing.
  4. Active Trading Fundamentals

    How The Sharpe Ratio Can Oversimplify Risk

    When it comes to hedge funds, this measure is not reliable on its own.
  5. Options & Futures

    The REIT Way

    Ever considered investing in real estate? Read about the REIT and see if it's the investment for you.
  6. Bonds & Fixed Income

    Asset Allocation In A Bond Portfolio

    An investor's fixed-income portfolio can easily beat the average bond fund. Learn how and why!
  7. Bonds & Fixed Income

    Equity Valuation In Good Times And Bad

    Learn how to filter out the noise of the market place in order to find a solid way of determing a company's value.
  8. Investing

    What is a tranche?

    "Tranche" is actually a French word meaning "slice" or "portion". In the world of investing, it is used to describe a security that can be split up into smaller pieces and subsequently sold to ...
  9. Investing

    Who are the key players in the bond market?

    The bond market can essentially be broken down into three main groups: issuers, underwriters and purchasers. The issuers sell bonds or other debt instruments in the bond market to fund the operations ...
  10. Personal Finance

    Why Are Mortgage Rates Increasing?

    Learn how the secondary mortgage market and investor demand affect the cost of home ownership.

You May Also Like

Hot Definitions
  1. Trust Fund

    A trust fund is a fund comprised of a variety of assets intended to provide benefits to an individual or organization. The ...
  2. Christmas Tree

    An options trading strategy that is generally achieved by purchasing one call option and selling two other call options at ...
  3. Christmas Club

    A short-term savings account that usually pays out the full account balance to its account holders once each year, right ...
  4. Boston Snow Indicator

    A market theory that states that a white Christmas in Boston will result in rising stock prices for the following year. For ...
  5. Christmas Island Dollar

    The former currency of Christmas Island, an Australian island in the Indian Ocean that was discovered on December 25, 1643. ...
  6. Santa Claus Rally

    A surge in the price of stocks that often occurs in the week between Christmas and New Year's Day. There are numerous explanations ...
Trading Center