What characterizes a mortgage-backed security?

A mortgage-backed security (MBS) is characterized by being backed by a pool of mortgage loans. This means that the MBS is created by bundling together numerous mortgage loans and then selling shares of that entire pool to investors. The payments made by homeowners on their mortgages flow through to the MBS investors, providing them with a stream of income.

This structure allows investors to gain exposure to the real estate market without having to purchase properties directly, as they can invest in a diversified and often more manageable financial instrument. Additionally, the pooling of individual mortgages helps to spread the risk, as the performance of the security depends on the collective payments of many borrowers rather than any single mortgage.

The other options describe features that do not apply to mortgage-backed securities specifically. For example, while certain mortgages may require high credit scores, the MBS itself is not defined by credit score requirements. Similarly, mortgage-backed securities are not short-term loans and do not involve peer-to-peer lending, as they are structured financial products that are typically sold by institutions rather than directly between individuals.