A mortgage-backed security is an investment security backed by a pool of mortgage loans.
A mortgage-backed security, often called an MBS, is an investment security backed by a pool of mortgage loans.
An MBS matters because it helps explain why many mortgages are standardized, saleable, and priced within a broad national market instead of being held only by the original lender.
It also matters because borrowers can mistake the term for a completely separate kind of loan. An MBS is not the mortgage the borrower signs. It is a security created from many mortgages after origination.
Borrowers usually encounter MBS concepts behind the scenes, through rate behavior, conforming standards, and loan-sale or servicing-change notices.
The term becomes practical when a borrower wants to understand how mortgage funding continues after closing and why the mortgage market is so interconnected.
A group of similar mortgages is pooled together and used to back a security that can be bought by investors. That pooled security is a mortgage-backed security.
An MBS differs from Securitization because securitization is the process, while the MBS is the resulting security.
It also differs from a Whole Loan. A whole loan is an individual mortgage asset sold intact, while an MBS is backed by a pool of many loans.