What is the definition of Mortgage-Backed Securities?
Mortgage-backed securities are securities, which are guaranteed by a pool of mortgages. The bearers of the mortgage-backed securities are authorized to receive the mortgage payments from the pool. That means that whenever someone sends a payment for his mortgage, a portion of the payment will be given to those who bear mortgage backed securities.
This kind of security is usually issued by a government entity or investment firm, which buys the mortgages issued from the bank. The result is a pool of mortgages that investors can buy into. The securities are prized according to their portion in the pool, as well as the credit rating of the selected section of the pool.
Mortgage-backed securities help in spreading the risk, so that the "exposure" is not that great and there is a guaranteed level of return. Since there is a pool with a big amount of mortgages, the impact of the default from one or two mortgage bearer will not be that big.
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