Mortgage-Backed Securities [MBS]

Mortgage-Backed Securities (MBS) are investment products created by pooling together hundreds or thousands of individual mortgage loans. Banks and mortgage lenders originate loans, then sell them to government agencies (like Fannie Mae or Freddie Mac) or investment banks, which package them into MBS. Investors who buy MBS receive monthly payments derived from the mortgage payments made by homeowners. For example, if 1,000 mortgages averaging $200,000 each are pooled, this creates a $200 million MBS. When homeowners make their monthly payments, that money flows through to MBS investors. There are two main types: pass-through securities (which pass payments directly to investors) and collateralized mortgage obligations (CMOs, which are divided into tranches). MBS played a central role in the 2008 financial crisis when subprime mortgages defaulted en masse, causing MBS values to collapse.