Stripped mortgage-backed securities (SMBS)

Securities that redistribute the cash flows from the underlying generic MBS collateral into the principal and interest components of the MBS to enhance their attractiveness to different groups of investors.

Stripped Mortgage-Backed Security

A mortgage-backed security with a cash flow that derives exclusively from interest payments or principal payments on the underlying mortgages. That is, the underlying asset of a stripped MBS is interest or principal paid on debt securities, rather than both together. Stripped mortgage-backed securities are extremely sensitive to changes in interest rates, allowing investors to choose either an interest strip or a principal strip depending on the expected direction of interest rates.

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