Mortgage-backed security (MBS).
In plain English
A mortgage-backed security packages many individual home loans together and sells slices of that bundle to investors. The monthly mortgage payments from all those homeowners flow through to the people who own the security. This is how money that funds mortgages gets recycled: lenders sell the loans into these securities, freeing up cash to lend again. The price investors pay for MBS feeds back into the mortgage rates lenders can offer.
01Why it matters
Mortgage rates are shaped less by the Fed directly and more by what investors will pay for mortgage-backed securities, so MBS demand is part of why your mortgage rate is what it is.
02The math, step by step
When demand for mortgage-backed securities is strong, investors accept a lower yield to hold them, and lenders can offer lower mortgage rates. When investors sell MBS and demand falls, mortgage rates tend to rise even if the Fed has not moved.
03What this is NOT
An MBS is not a Treasury bond. A Treasury is a direct loan to the U.S. government; an MBS is backed by private home loans and carries the risk that homeowners prepay or default, which a Treasury does not.
04Receipts
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