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What are Mortgage Backed Securities?
A mortgage-backed security (MBS) is an asset-backed security whose cash flows are backed by the principal and interest payments of a set of mortgage loans. Payments are typically made monthly over the lifetime of the underlying loans.
However not all securities backed by mortgages are considered mortgage-backed securities. Housing Bonds (Mortgage Revenue Bonds) are backed by the mortgages which they fund, but aren't MBSs.
Residential mortgages in the United States have the option to pay more than the required monthly payment (curtailment) or to pay off the loan in its entirety (prepayment). Because curtailment and prepayment affect the remaining loan principal, the monthly cash flow of an MBS is not known in advance, and therefore presents an additional risk to MBS investors.
Commercial mortgage-backed securities (CMBS) are secured by commercial and multifamily properties (such as apartment buildings, retail or office properties, hotels, schools, industrial properties and other commercial sites). The properties of these loans vary, with longer-term loans (5 years or longer) often being at fixed interest rates and having restrictions on prepayment, while shorter-term loans (1-3 years) are usually at variable rates and freely pre-payable.
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Video - Introduction To Mortgage Backed Securities I
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Video - Introduction To Mortgage Backed Securities II
Video - Introduction To Mortgage Backed Securities III
