Glossary

A Mortgage-Backed Security (MBS) is a type of financial instrument that represents an ownership interest in a pool of mortgage loans.

These loans are typically residential or commercial property mortgages. The MBS is created when a financial institution bundles a group of mortgages and sells the cash flows generated by those mortgages to investors. Investors receive periodic interest and principal payments from the underlying mortgages. 🏠💵

An example of an MBS is a security issued by a government-sponsored enterprise like Fannie Mae or Freddie Mac, which pools thousands of residential mortgages and sells them to investors as MBS.

Fun fact: The MBS market played a significant role in the 2008 financial crisis. Investors' appetite for high-yield MBS backed by subprime mortgages led to a housing bubble, which eventually burst, causing the value of MBS to plummet and contributing to the financial meltdown. 📉😲