Mortgage-Backed Securities (MBS)
Mortgages are originated by savings and loans, commercial banks, and mortgage bankers. The mortgages are collected together (bought) in pools by agencies (or the originators themselves), and investors buy an interest in the pool. The shares in the pool, MBS, are much more liquid than the component mortgages. With pass-through securities the monthly interest and principal payments are collected and passed through to the investors in proportion to their investment in the pool. The cash flows can be uncertain because of prepayment of the underlying mortgages. With collateralized mortgage obligations (CMOs) the securities are grouped into classes (tranches) that receive semiannual interest payments until maturity and principal payments semiannually sequentially according to the class of security by maturity. CMOs have more of the characteristics of ordinary bonds. The last class in line bears the uncertainty of cash flows from the underlying mortgages. GNMA (Ginnie Mae) pools are derived from mortgages issued by FHA, VA, or FmHA. Because GNMA is an actual part of HUD, the securities carry a U.S. government guarantee of payment. The Federal Home Loan Mortgage Corp, FHLMC or Freddie Mac, is a corporation independent of the U.S. government but carrying an implied U.S. government guarantee of its obligations. FHLMC participation certificates are pass-through securities guaranteed by FHLMC, not by the Federal government. FHLMC guaranteed mortgage certificates are mortgage-backed securities with semiannual interest payments and annual principal payments guaranteed by FHLMC. FHLMC collateralized mortgage obligations are CMOs. FNMA (Fannie Mae) issues participation certificates. Other assets besides mortgages can be securitized.