What is a mortgage-backed security?

A mortgage-backed security is an investment that is secured by a pool of mortgages or a collection of mortgages. This means that the cash flows generated from the payments made on the underlying mortgages are used to pay dividends to the investors in the mortgage-backed security. These securities carry the risk of mortgage defaults, and their value is influenced by various factors including interest rates and housing market conditions.

By investing in mortgage-backed securities, investors are effectively gaining exposure to the performance of the real estate market without directly purchasing properties. This type of financial instrument plays a significant role in the broader financial markets, providing liquidity to mortgage lenders and enabling home purchasing for buyers who may not have been able to afford a home without such financing options.