Mortgage-Backed Securities

A mortgage-backed security (MBS) is what you get when a bank gathers thousands of home loans, bundles them together and sells slices of the bundle to investors. As homeowners make their monthly payments, the money flows through to whoever holds the slices. This process is called securitization.

When the loans are sound, it is a decent way to spread risk around. When they are not, as with the US subprime loans before 2008, the rot spreads with them. That crisis nearly brought down the global banking system. Today central banks like the Fed buy and sell MBS as part of their balance-sheet policy.