Definition

1. Noun:
   • A mortgage-backed security is a type of financial investment (a security) created by pooling together many individual home loans (mortgages). This pool is then divided into shares or bonds that are sold to investors. The investors receive regular payments derived from the homeowners' mortgage payments (interest and principal).

Usage

• Noun:
  • The bank issued a new mortgage-backed security to raise capital.
  • Many pension funds invest in mortgage-backed securities for their steady income stream.
  • The stability of a mortgage-backed security depends on the homeowners' ability to pay their mortgages.

Advanced Usage

• "Government-sponsored enterprise (GSE) mortgage-backed security": A specific type of mortgage-backed security that is guaranteed by a government-sponsored entity like Fannie Mae or Freddie Mac, which reduces the risk for investors.
  • The fund primarily holds GSE mortgage-backed securities, which are considered lower-risk.
• "Private-label mortgage-backed security": A mortgage-backed security issued by private financial institutions, not government-sponsored entities, often seen as carrying higher risk.
  • The financial crisis exposed the risks in many private-label mortgage-backed securities.

Variants and Related Words

• MBS (n): A common abbreviation for "mortgage-backed security."
  • The MBS market is a major part of the fixed-income sector.
• Securitization (n): The general process of pooling various types of debt (like mortgages, auto loans) to create a new financial instrument (a security) that can be sold to investors.
  • The securitization of mortgages led to the creation of mortgage-backed securities.

Synonyms

• Asset-backed security (ABS): A broader category of securities backed by a pool of assets, which can include auto loans, credit card debt, or mortgages. A mortgage-backed security is a specific type of ABS.
• Bond: While a mortgage-backed security is a type of bond, not all bonds are mortgage-backed. Bonds are debt instruments where an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period at a fixed interest rate.

Related Terms and Concepts

• Tranche (n): A slice or portion of a mortgage-backed security that has a different level of risk and return. Different tranches are paid in a specific order.
  • The senior tranche of the mortgage-backed security is paid first and carries the lowest risk.
• Collateral (n): The asset that backs a security. For a mortgage-backed security, the collateral is the pool of mortgages and the underlying real estate properties.
  • The value of the mortgage-backed security is tied to its collateral.

Noun

1. a security created when a group of mortgages are gathered together and bonds are sold to other institutions or the public; investors receive a portion of the interest payments on the mortgages as well as the principal payments; usually guaranteed by the government