Mortgage-backed security is a special type of asset-backed security. Here, a mortgage or sometimes a group of mortgages is used for the purpose of security.
This pool of mortgages is formed of mortgages with certain common characteristics such as same rates of interest or same maturity. Whenever a mortgage is sold, the buyer clubs it with the other mortgages of its type, or in other words, incorporates it into his pool.
The loans here are packaged together in the form of securities, which can be bought by the investors. There can be different types of mortgage-based securities such as collateralized mortgage obligations and the collateralized debt obligations (CDOs).
The securitization process involved here is quite complex. It mainly depends on the jurisdiction in which it occurs. It allows the investors to choose from different kinds of investment and risk.
The contribution of Mortgage-backed securities can never be underestimated. They helped in providing more capital in the housing sector at a time when the housing sector was facing a lot of problems. The main advantage of this kind of an arrangement was- whether the borrower made the repayment or not did affect the sender in any way once he had sold off the mortgage.
When one invests in a Mortgage-backed security, he basically lends money to a homebuyer or business. It is basically the way in which the small, regional banks issue these mortgages to their clients, irrespective of whether they have the sufficient assets to repay the loan.
Mortgage-backed securities provide you with a safe option to earn money. They can be bought from various places as there are a number of places meant for buying and selling MBS.
They can be bought by the government, private or semi-government organisation and are of two different types-Participation Certificate and Collateral Mortgage Obligation. http://www.tradingeconomics.com/