mortgagebacked

Mortgage-backed refers to securities or financial instruments whose payments derive from a pool of mortgage loans. These are created through securitization, where lenders bundle residential or other mortgages into a trust and issue securities to investors. The resulting securities pass along most mortgage payments after servicing fees.

A common type is the pass-through mortgage-backed security, in which each payment is distributed pro rata to investors. More complex structures, such as collateralized mortgage obligations (CMOs), place cash flows into tranches with different priorities and risk–return profiles. Many mortgage-backed securities are issued or guaranteed by government-sponsored enterprises such as Fannie Mae, Freddie Mac, and Ginnie Mae (agency MBS). Private-label mortgage-backed securities are issued by banks or special purpose vehicles and may carry higher credit risk.

Origins and market role: The U.S. mortgage market expanded through securitization beginning in the late 20th century, providing liquidity to lenders and broadening access to housing finance. The market grew substantially but also contributed to systemic risk during the 2007–2008 financial crisis, when subprime and other risky loans were securitized. Since then, reforms have emphasized transparency, risk retention, and higher capital standards for certain securitizations.

Risks and considerations: Prepayment risk arises when borrowers refinance or pay off loans early, affecting expected cash flows. Interest rate risk affects the value of the securities as rates move. Credit risk varies by issuer and structure; agency MBS tend to have government backing, while private-label MBS typically carry higher credit risk. Liquidity risk and complex pricing models are additional considerations for investors and analysts.