MBS (Mortgage-Backed Securities)

Mortgage-backed securities (MBS) are a type of asset-backed security created by pooling together a collection of residential or commercial mortgages. Like a vessel fashioned to carry the dreams of many travelers, MBS transform illiquid mortgages into tradeable securities that can be bought and sold by investors. The principal and interest payments from the underlying mortgages generate cash flows that are passed through to the MBS holders, offering them an income stream and diversification of risk.

Example

A financial institution holds a large number of residential mortgages on its balance sheet. To free up capital and reduce risk, the institution pools these mortgages and creates an MBS. This MBS is then sold to investors who receive income from the homeowners' monthly mortgage payments. By investing in MBS, investors gain exposure to the housing market without directly owning the underlying mortgages. MBS can help financial institutions manage risk, improve liquidity, and create new investment opportunities for a broader range of investors.