What is Mortgage-Backed Security ?
658 reads · Last updated: December 5, 2024
Mortgage-backed securities (MBS) are investment products similar to bonds. Each MBS consists of a bundle of home loans and other real estate debt bought from the banks that issued them. Investors in mortgage-backed securities receive periodic payments similar to bond coupon payments.
Definition
Mortgage-Backed Securities (MBS) are investment products similar to bonds. Each MBS is composed of a bundle of home loans and other real estate debts purchased from the banks that issued them. Investors in MBS receive periodic payments similar to bond interest payments.
Origin
Mortgage-Backed Securities originated in the United States in the 1960s, initially issued by government-sponsored enterprises like Fannie Mae and Freddie Mac. They were created to increase liquidity in the housing market, allowing banks to sell loans to investors and free up capital to issue more loans.
Categories and Features
MBS are primarily divided into two categories: agency MBS and non-agency MBS. Agency MBS are issued by government-sponsored enterprises and are generally considered lower risk. Non-agency MBS are issued by private financial institutions, carrying higher risk but potentially offering higher returns. Key features of MBS include interest rate risk and prepayment risk, which investors need to consider.
Case Studies
A typical case is during the 2008 financial crisis when many investors held MBS that devalued due to rising default rates on subprime loans, leading to significant losses. Another example is the government takeover of Fannie Mae and Freddie Mac post-crisis to stabilize the MBS market and restore investor confidence.
Common Issues
Investors often worry about the interest rate risk and prepayment risk associated with MBS. Rising interest rates can lead to a decrease in MBS value, while borrowers prepaying loans can affect expected returns. Understanding these risks and implementing proper risk management is crucial when investing in MBS.
