Mortgage Backed Security (MBS)
In financial terms, a "Security" is Collateral given or pledged to guarantee the fulfillment of an obligation, especially that a creditor will be repaid (usually with interest) any money or credit extended to a debtor. It is a financial Instrument, an asset that holds monetary value making it viable worthy of trade.
A Mortgage Backed Security is secured or backed by a collection of mortgages and other Real Estate loans. A number of mortgages are packaged/pooled together with similar characteristics for Investors to buy. For the sake of general understanding, The Mortgage Backed Securities can generally be categorized into three groups.
The first group of the Mortgage backed securities,, purchased and issued by the Federal Government Enterprise Ginnie Mae hold the highest credibility. The Federal government guarantees the Interest and Principal payments on these MBS's. These carry the full faith and the confidence of the United States Federal Government.
The second group of the Mortgage backed securities are purchased and issued by the Government Sponsored Enterprises (GSE's) like Fannie Mae and Freddie Mac. These hold strong credibility, are government sponsored however these are not backed by the United States Federal Government.
The third group consists of private firms that include subsidiaries of Investment banks, financial institutions and builders or a group of builders who may rate less and credit worthy compared to the two categories above.
Since the borrowers make monthly principal and interest payments on their mortgages, MBS investors receive monthly payments rather than quarterly and annual payments.
Related Topics: What are Government sponsored Enterprises (GSE's) What is Fannie Mae What is Freddie Mac What is Ginnie Mae
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