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Glossary

MBS Mortgage Backed Securities

Financial Term

MBS (Mortgage Backed Securities) refers to a type of financial instrument that is backed by a pool of mortgage loans. These securities are created by investment banks, which purchase mortgages from lenders and then bundle them together into a pool. The pool is then divided into tranches and sold to investors, who receive a portion of the income generated by the underlying properties.

The use of MBS is prevalent in the financial industry because it provides an efficient way for banks to raise money. By selling the pool of mortgages, banks can free up capital to make new loans and increase their profitability. Additionally, MBS allows investors to diversify their investments since the securities are backed by mortgages from a wide range of borrowers with different credit ratings and loan sizes.

MBS can be structured in different ways, depending on the preferences of the issuer and the needs of the investors. Some MBS are pass-through securities, which means that the income generated by the underlying mortgages is passed through to the investors. Other MBS are structured as collateralized debt obligations (CDOs), which are composed of tranches with different risk profiles.

While MBS can provide significant benefits to investors and lenders, the financial crisis of 2008 highlighted some of the risks associated with these securities. In particular, some MBS were found to be backed by risky, subprime mortgages that defaulted at higher rates than traditional mortgages. As a result, many investors suffered losses, and the market for MBS was severely disrupted. However, MBS remain an important part of the financial industry and are expected to continue to be used as a means of financing mortgages.


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