What is a mortgage-backed security (MBS)? Why is it difficult for ratings agencies to determine the risk of an MBS? Describe how the existence of MBSs helps homebuyers in the United States.
What is a mortgage-backed security (MBS)? Why is it difficult for ratings agencies to determine the risk of an MBS? Describe how the existence of MBSs helps homebuyers in the United States.
Introduction:
Mortgage is nothing but an instrument of debt that the creditor is obliged to pay off with a fixed collection of instalments, backed by assets of specified real estate property.
Answer:
Usually, a mortgage based security (MBS) is a security that is exchanged in and backed by mortgages in secondary financial markets. It is a synthetic security formed by pooling a vast number of individual loans secured by individual mortgages together. Since home loans are usually funded by home mortgages to lenders, you can see mortgage-based securities generated by home loans.
A bank lends a home loan to a person. To build one mortgage backed security, hundreds of such loans are then bundled together. A customer does not need to purchase the whole package, but can buy a tranche called a pie in the MBS. In stocks, we have traditionally seen two kinds of MBS, pass by securities and collateralized debt obligations.
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