A
derivative whose value is derived from
home equity loans and
mortgages on properties where people live. As with all mortgage-backed securities, this entitles the owner to a claim on the
principal and
interest payments on the particular mortgages underpinning the security. MBS's 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 a residential MBS is the possibility that interest rates on home loans may decline, causing homeowners to
refinance their mortgages and deprive the
holder of the security from future interest payments.