Definition:

Mortgage-Backed Securities (MBS) are financial instruments that are secured by a collection of mortgages. These securities are created when a bank or other financial institution bundles together a group of mortgages and sells them as a single security to investors. The investors then receive periodic payments derived from the principal and interest payments made by the borrowers of the underlying mortgages.

Examples

Examples of Mortgage-Backed Securities include Residential Mortgage-Backed Securities (RMBS), which are backed by residential mortgages, and Commercial Mortgage-Backed Securities (CMBS), which are backed by commercial real estate loans.

Formula:

There is no specific formula for Mortgage-Backed Securities, as they are structured products. However, the cash flow to investors can be represented as:

Cash Flow = Principal Repayments + Interest Payments - Fees

How to use the metric:

Investors use MBS to gain exposure to the real estate market and to earn returns from mortgage payments. They analyze the credit quality of the underlying mortgages, prepayment risks, and interest rate risks to assess the potential returns and risks associated with the MBS.

Limitations:

Mortgage-Backed Securities are subject to prepayment risk, where borrowers may pay off their mortgages early, affecting the expected cash flows. They are also sensitive to interest rate changes, which can impact the value of the securities. Additionally, the complexity of MBS structures can make them difficult to analyze and understand.

Applies to:

Mortgage-Backed Securities are primarily applicable to the financial services industry, particularly in banking, investment management, and real estate finance.

Doesn't apply to:

MBS do not apply to industries unrelated to finance or real estate, such as manufacturing or technology, as these industries do not typically deal with mortgage-backed financial products.

Summary:

Mortgage-Backed Securities are financial instruments backed by a pool of mortgages, offering investors exposure to the real estate market. They provide periodic cash flows derived from mortgage payments but come with risks such as prepayment and interest rate sensitivity. MBS are mainly relevant to the financial services industry and require careful analysis due to their complexity.