Mortgage-Backed Securities Explainer
Mortgage-backed securities, or MBS, are debt instruments supported by payments from pools of mortgage loans. In a basic pass-through, investors receive their share of borrower principal and interest after servicing and other applicable fees.
Government National Mortgage Association securities carry a U.S. government guarantee of timely principal and interest on qualifying pools. Fannie Mae and Freddie Mac provide their own guarantees under different legal status, while private-label MBS depend on transaction structure and collateral without the same federal backing.
Homeowners can refinance, sell, or otherwise repay early. Faster prepayments return principal when rates may be low, creating reinvestment risk and limiting price gains. When rates rise, prepayments can slow and extend expected maturity, increasing price sensitivity. This changing cash flow contributes to negative convexity.
More complex collateralized mortgage obligations divide payments among tranches with different priorities and timing. Investors must assess loan quality, geographic and borrower concentration, guarantee terms, servicing, prepayment models, credit enhancement, liquidity, and stress scenarios. The stated final maturity alone does not describe expected cash flow.
Borrower principal and interest flow through a pool and servicer.
Fees and guarantees affect what investors receive.
Falling rates can return principal sooner; rising rates can extend it.
Expected maturity is not fixed.
Ginnie Mae, government-sponsored enterprise, and private-label structures carry different backing.
Read the exact promise.
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