A mortgage-backed security (MBS) is a bond whose cash flows are backed by homeowners' mortgage payements. The nuance which makes an MBS more interesting than the average bond is the uncertainty in the timing of the cash flows. Since homeowners (in the United States) are almost universally given the option to prepay their entire mortgage, an investor can not be certain of the timing of the cash flows. Mortgage prepayments are most often made because a home is sold or because the homeowner is refinancing to a new mortgage, presumably with a lower rate or shorter term.
Credit worthiness is what determines whether or not a bond investor will ever receive the principle cash flows. The credit worthiness of mortgage backed securities is fairly high due to pooling many mortgages together to back an MBS as well as a guarantee in the case of MBS created by Fannie Mae, Freddie Mac, or Ginnie Mae .
Levels and flows
United States
US Mortgage-backed securities, which accounts for nearly one-sixth of global underwriting, posted a record year in 2003.
US isses reported by Thomson Financial ([1] (http://www.thomson.com/financial/investbank/fi_investbank_league_tablearchive_debt.jsp)) ($ billions and number of issues)
A mortgage loan that is not insured or guaranteed by the federal government.
The legal process by which property that is mortgaged as security for a loan may be sold to pay a defaulting borrower's loan.
Securities created by "stripping" or separating the principal and interest payments from the underlying pool of mortgages into two classes of securities, with each receiving a different proportion of the principal and interest payments.
Mortgagebackedsecurities are sold as bonds and their coupon payments and par value are derived from the original mortgages from which they are created.
Mortgagebackedsecurities are a class of derivatives since the owner of these bonds derives the return from the payments on mortgages, but does not actually own the mortgage itself.
Since mortgagebackedsecurities are bondsbacked by pools of residential mortgages they may be highly unpredictable due to the varying repayment patterns of homeowners who often prepay mortgages.
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