What are Mortgage Backed Securities?
Mortgage backed securities are interests in a pool of mortgages which entitle the bearers to payments from the pool. One could think of them like shares in a home loan; whenever the borrower makes a payment on his or her mortgage, a portion of that payment ends up in the hands of a bearer of mortgage backed securities. This type of security is known as a “debt security,” meaning that the bearer has an interest in a form of debt. Usually, the way mortgage backed securities work is that an investment firm or government entity buys a large number of mortgages from the issuing bank, creating a pool of mortgages. Investors can buy into that pool for a set amount per share, and as payments are made, they get returns which vary in size, depending on how many shares they own and the rating of their shares. The idea is that by spreading the risk, the investors are guaranteed a certain level of return, since if one homebuyer in a pool of 1,000 defaults on his or her mortgage, this will not have
