mortgage-backed security
An investment backed by a pool of mortgages, allowing investors to receive monthly principal and interest payments from homeowners' mortgage payments.
Example
“Pension funds bought mortgage-backed securities for their stable income — until the 2008 crisis revealed the underlying loans were toxic.”
Memory Tip
MBS = a bond backed by homeowner mortgage payments. Your mortgage payments go to bondholders.
Why It Matters
Mortgage-backed securities affect the housing market and economy because they influence how easily banks can lend money for home purchases. When investors buy these securities, banks have more capital to issue new mortgages, which impacts home prices and interest rates that affect whether you can afford to buy a house.
Common Misconception
Many people think that buying a mortgage-backed security means you own someone's home or have a claim to their property. In reality, you only receive a share of the monthly payments from many homeowners' mortgages, not ownership of any specific house or direct relationship with borrowers.
In Practice
A bank originates 1000 mortgages worth 300 million dollars total and sells them to an investment company for 295 million dollars. That company packages these mortgages into securities and sells shares to investors, who then receive monthly payments totaling approximately 2 million dollars from homeowners' mortgage payments, minus fees and servicing costs.
Etymology
MORTGAGE (home loan) BACKED (secured by) SECURITY (tradeable investment). An investment BACKED by MORTGAGE payments.
Common Misspellings
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See Also
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