Mortgage-Backed Security

Financial Dictionary -> Mortgages -> Mortgage-Backed Security

A mortgage backed security is a financial security based off the back of a pool of mortgages, which are gathered together. These financial bonds are sold to the public or other financial institutions and the investors get a percentage of the interest that is paid on the mortgages, as well as the payments of the principal.

The process works when mortgages are bought away from the original banks, mortgage companies, and other institutions, and then assembled in to groups and pools. This is only usually done by Government Agencies such as the Ginnie Mae - Government National Mortgage Association, the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac).

A mortgage backed security is performance representative of the financial claims on the principal and Interest payments on the loans in the pool, which is commonly called securitization. These can then be sold as bonds and other securities.

From the new millennium onwards private mortgage back securities were commonly issued without sufficient credit enhancement, with many pools created on high risk subprime mortgages. They began to pose a serious credit risk, with a collapse inevitable. Units of these risky securities rose sharply until 2007/08, when the bubble burst and borrowers began to lose their homes to high interest rates and foreclosures. This caused a ripple effect throughout the economic recession.