Explanation of Mortgage Backed Securities

Mortgage Backed Securities
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".
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
This type of security is also commonly used to redirect the interest and principal payments from
different classes of securities, depending on the riskiness of different mortgages as they
are classified under the MBS.