Mortgage-Backed Securities (MBS) are a type of investment product that plays a significant role in the real estate investment industry. Mortgage-Backed Securities (MBS) are financial instruments that are backed by a pool of mortgages, typically residential but sometimes commercial. These mortgages are bundled together into a security, and the interest and principal payments from the underlying mortgages are passed through to the investors who hold the MBS.
Investors in MBS receive periodic payments, much like bondholders do, based on the interest and principal payments made by the borrowers on the underlying mortgages. This provides investors with exposure to the real estate market without having to directly own or finance properties.
The risk in investing in MBS comes from the possibility that the underlying borrowers may default on their mortgage payments. To manage this risk, MBS are often structured in tranches, or layers, that have different priorities in receiving payments from the underlying mortgages. The tranches that are first in line to receive payments are considered less risky, while those further down the line carry more risk.
MBS played a significant role in the financial crisis of 2008, as the collapse in housing prices led to a sharp increase in mortgage defaults, significantly impacting the value of these securities.
In the real estate investment industry, Mortgage-Backed Securities provide a way for investors to gain exposure to the property market, potentially earning returns based on the performance of the underlying mortgages, but also bearing the associated risks. They can be an important part of a diversified investment portfolio, but they require careful consideration of the underlying assets, the structure of the security, and the economic and market conditions that may affect their performance.