Mortgage Backed Securities (MBS)

Mortgage Backed Securities (MBS) are financial instruments that represent a group of mortgage loans. These securities are created by pooling together a collection of individual mortgages and then selling them to investors.

MBS are typically created in the primary mortgage market by lenders. These lenders gather a pool of mortgage loans, and then a financial institution structures these loans into MBS and sells them to investors.

MBS provide investors with a variety of returns. Primarily, MBS represent the cash flows generated from the interest and principal payments on the underlying mortgage loans. This cash flow provides MBS holders with a regular income stream.

MBS can have different risk profiles. For example, some MBS may consist of loans with lower credit ratings, while others may consist of loans with higher credit ratings. MBS with lower credit ratings may offer higher potential returns, but they also carry higher risks.

MBS can also have various structures and payment plans. For instance, fixed-rate MBS consist of mortgage loans with a specific interest rate, while adjustable-rate MBS consist of mortgage loans that have interest rates that can change over time.

Another important aspect of MBS is the securitization process. In this process, a financial institution structures the mortgage loans into MBS and sells these securities to investors, thereby clearing the balance sheet of the lenders and creating more capacity for lending.

However, it is known that MBS can become risky during financial crises. Particularly during the 2008 financial crisis, the mortgage crisis in the United States caused the value of MBS to decline and had a significant impact on the global financial system. Therefore, MBS can carry risks for investors and should be carefully evaluated.

In conclusion, Mortgage Backed Securities (MBS) are financial instruments that represent a collection of mortgage loans pooled together and sold to investors. MBS provide investors with cash flows generated from the underlying mortgage loans and can have different risk profiles and payment plans. However, MBS can become risky during financial crises and should be evaluated with caution.