MBS (Mortgage-Backed Securities)

Mortgage-backed securities (MBS) are a type of asset-backed security created by pooling a group of residential or commercial mortgages. MBS turn illiquid mortgages into tradable securities that investors can buy and sell. Principal and interest payments from the underlying mortgages generate cash flows that pass through to MBS holders, giving them an income stream and spreading risk across the pool.

Example

A financial institution holds many residential mortgages on its balance sheet. To free up capital and reduce risk, it pools those mortgages and creates an MBS. The institution then sells the MBS to investors, who receive income from homeowners' monthly mortgage payments. By investing in MBS, investors get exposure to the housing market without directly owning the underlying mortgages. MBS can help financial institutions manage risk, improve liquidity, and create investment opportunities for a wider group of investors.