What is a mortgage-backed security (MBS)?

A mortgage-backed security (MBS) is best defined as a bundle of home loans purchased by an investor. This financial instrument is created when multiple mortgages are pooled together and sold as a single security in the financial markets. Investors in MBS receive a return based on the mortgage payments made by homeowners, which creates a stream of income. This system allows banks and mortgage lenders to free up capital, enabling them to issue more loans, while offering investors an opportunity to invest in the real estate market without directly purchasing property.

The concept of pooling multiple loans into a single security allows for greater liquidity and diversification for investors, which is a significant aspect of MBS. This structure also mitigates some of the risks associated with investing in individual loans, as the performance of the MBS is tied to the combined performance of all the underlying loans rather than a single mortgage.

Understanding the nature of mortgage-backed securities is crucial for investors and real estate professionals, as MBS play a significant role in the broader finance and real estate markets, impacting interest rates and housing availability.