Mortgage Backed Security (MBS)

What’s a Mortgage Backed Security?

Mortgage-Backed security (MBS) is comprised of many individual loans to home buyers, which originated from a regulated and authorized financial institution and have similar terms and risk profiles. Loan institutions sell individual loans to increase capital, and the companies that buy them and bundle them together then sell shares in these grouped MBSs to investors--once an accredited credit rating agency gives the security one of the top two credit ratings.

How Do Mortgage Backed Securities Work?

A home buyer applies for a $100,000 loan at bank ABC. The bank verifies the buyer’s credit and employment, then approves the loan and pays $100,000 towards the purchase of the home. The buyer promises to pay back the loan via monthly payments over the course of 30 years.

Bank ABC decides it would like to make more loans but needs the cash it loaned to the buyer in order to do so. Therefore, ABC sells the debt and the 30-year stream of payments to company XYZ which groups other similar loans from multiple home buyers who have profiles similar to this buyer, creating an MBS.

Company XYZ then offers shares of the loan payments to investors who pay XYZ for enough shares of the MBS that XYZ can buy more mortgages and group those together to make more mortgage-backed securities. When the buyer makes their monthly mortgage payment, ABC takes a portion of the payment, passes the rest along to XYZ, which also takes a portion, before dispersing the remaining balance to shareholders of the MBS.

Pass-Through Security vs. Collateralized Mortgage Obligation

The type of MBS example above is known as pass-through security, which has the structure of a trust that makes payments to investors from the payments made on the mortgage. These types of mortgage-backed securities typically have five, 15, and 30-year maturities, although the actual life of a pass-through can be less if the homeowners pay off their loans early.

The other type of MBS is a collateralized mortgage obligation (CMO). This type of MBS is comprised of several pools of securities called tranches. CMO tranches, or slices, use the interest and principal payments to create other securities with varying maturities and coupons.

Investors are interested in the home loan market because built into the home buying process is a stringent screening process, but also, the loan is secured by the home that’s being purchased.

The screening process reduces the risk of default by the home buyer, but the house itself is an extra measure of insurance the loan possesses because it can be seized if the borrower fails to make their payments.

Overall, an MBS allows investors to make their capital available to home borrowers without having to actually make individual loans to home buyers.

Finding Information About Mortgage Backed Securities on Investing.com

The U.S. MBA 30-Year Mortgage Rate is a weekly release that’s listed on Investing.com’s Economic Calendar.

By clicking on the Economic Calendar link that shows the release, users can get to the page on Investing.com that provides a historical chart of available rates as well as historical figures for MBS investments over the years. The chart can be customized to show specific periods or types of graphs by using the interactive controls in the margins.

Below the chart is a table of rates that can be expanded or condensed to show the desired amount of data a user might be seeking. Also, MBS information can be found on the Financial News page at Investing.com when new information is released.