mortgage backed security

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Mortgage-Backed Security

A derivative whose value is derived from unpaid mortgages. This entitles the owner to a claim on the principal and interest payments on the particular mortgages backing the security. MBSs pay an interest rate that is usually related to the interest rates the homeowners are paying on their mortgages. The equivalent of the coupon on a mortgage-backed security is a percentage of the interest and principal paid on the mortgages backing the security. An obvious risk to an MBS is the possibility that interest rates may decline, causing homeowners to refinance their mortgages. This provides capital to MBS holders, but it comes at a time when purchasing more MBSs would yield less due to the decline in interest rates. More complicated versions of MBSs include the collateralized mortgage obligation and the mortgage derivative. These attempt to reduce the risk associated with declines in interest rates.

Another risk associated with mortgage-backed securities is the possibility that a substantial number of mortgages will default. A main proximate cause of the credit crunch, which began in 2006-2007, was the fact that many mortgage-backed securities backed by subprime mortgages began to default. See also: Credit risk, Liquidity risk, Credit crunch.

mortgage backed security (MBS)

See collateralized mortgage backed securities.
References in periodicals archive ?
John is joining as member of the institutional MBS sales team.
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MBS launched its part time executive MBA programmes in the region in 2006 and has now has over 850 MBA students in the Middle East; the MBA graduates join a worldwide MBS alumni network of more than 27,000 business professionals.
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Microsoft is proud to recognize MBS Dev for its outstanding sales achievement," said Doug Kennedy, vice president, Microsoft Dynamics Partners and Support Services.
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