Mortgage-Backed Securities (MBS)

Mortgage-Backed Securities (MBS) are investment products that are created by pooling together a group of mortgages and selling Shares in that pool to investors. These Securities represent a claim on the Cash Flows generated by the underlying mortgage loans, which typically consist of principal and interest payments made by homeowners.

MBS are generally categorized into two types: pass-through Securities and Collateralized mortgage obligations (CMOs). Pass-through Securities involve direct flow of payments to investors, while CMOs involve tranches that can have different risk profiles and payment priorities.

Examples:

• Pass-Through MBS: A security where investors receive monthly payments that directly correspond to the mortgage payments made by borrowers.
• CMOs: These can be structured into different classes, such as Class A, B, and C, with varying levels of risk and return based on the priority of payments from the mortgage pool.

Cases:

• Subprime Mortgage Crisis (2007-2008): MBS backed by high-risk subprime loans lost significant value when borrowers defaulted, leading to widespread financial turmoil.
• Government-Sponsored Enterprises (GSEs): Entities like Fannie Mae and Freddie Mac issue MBS to facilitate homeownership, providing Liquidity and stability to the housing market.