Mortgage-backed securities (MBS) are formed by pooling together what?

Mortgage-backed securities (MBS) are financial instruments created by pooling together a large number of mortgages. When these mortgages are bundled together, they are sold to investors as MBS, which represent an ownership interest in the cash flows generated by the underlying mortgage loans. This pooling process allows for diversification, as investors can gain exposure to the mortgage market without having to individually purchase and manage each mortgage.

The cash flows generated from borrowers making their mortgage payments are then distributed to the MBS holders. This mechanism is a key aspect of how MBS function in the financial markets. It facilitates liquidity and provides funding for new mortgages, which in turn supports the housing market and home purchases, making MBS a crucial component of the mortgage financing ecosystem.