Mortgage-backed security (MBS)

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Mortgage-backed securities (MBS) are pools of mortgages packaged as collateral and sold as securities in the secondary mortgage market. The creation of these securities is credited to the Government National Mortgage Association [1] (Ginnie Mae), a wholly-owned federal corporation within the U.S. Department of Housing and Urban Development (HUD) [2]. The MBS program was designed to increase the supply of funds available for home mortgages. This is achieved by allowing banks and other mortgage lenders to sell portfolios of existing home mortgage loans (i.e., mortgage-backed securities). The product can be sold as one or more whole securities to large institutional investors, or purchased by small investors as shares of popular Ginnie Mae MBS mutual funds

MBSs made a small splash in 1968 when they first were issued, and today are at the heart of a billion dollar securitization industry. MBSs are called "pass-through" certificates. The monthly principal and interest payment from each of the underlying mortgage loans is "passed through" to investors. The interest rate of the security is lower than the interest rate of the underlying loan to allow for payment of servicing and guaranty fees. By selling a pool of mortgage loans to an MBS servicer, the lender receives funds equal to the underlying value of the pool, which will be used to make more home mortgage loans.

See especially Government National Mortgage Association, [3] Ginnie Mae, or GNMA.