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Mortgage-backed securities

From lawbrain.com

Mortgage-backed securities (MBS) are securities issued by governmental, quasi-governmental or private entities, that represent claims to the cash-flows from pools of residential mortgage loans.[1] Government National Mortgage Association (Ginnie Mae), a Governmental entity, and Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), both, U.S. government-sponsored enterprises, issue most of the non-private MBSs.

MBSs have different structures reflecting a diverse investor appetite for risk. A pass-through MBS, the most basic of all MBS structures, offer the investor a pro-rata share of the interest and principal payments on the pool of mortgages. More complex structures, such as collateralized mortgage obligation (CMO) or mortgage derivatives, structure or tranche the cash-flows in a way that achieve a target investment objective such as return rate or maturity.

Mortgage-based securities differ from other asset-based securities due to at least one added risk inherent in an MBS - the risk of prepayment of the mortgage loan. When a homeowner refinances a mortgage loan because of favorable refinance rates, the investor in the MBS gets his or her money returned at a time when their reinvestment opportunities are least desirable.

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  1. Securities and Exchange Commission, http://www.sec.gov/answers/mortgagesecurities.htm


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