What are Mortgage Backed Securities (MBS)?
Large banking institutions and government sponsored entities (GSE’s) purchase mortgages, which abide by certain standards, and package them together into securities which investors can buy. These securities are referred to as mortgage backed securities, or MBS. Mortgage backed securities bring liquidity into the mortgage markets and allow lenders to issue more loans and enable them to offer better pricing with their loans. Lenders no longer have to hold the mortgages on their books which frees up cash and removes the portfolio risk at the same time. Additionally, MBS securities offer investors the opportunity to buy securities with very high credit ratings. GSE’s, such as Fannie Mae and Freddie Mac are two of the largest originators of MBS and have the backing of the U.S. government to ensure investors payment of principal and interest from the underlying mortgages in the security. Securities issued from these two entities are also known as “Agency” mortgage backed securities. From an
