A Mortgage backed securities (hereinafter MBS ) is a financial structure that promises a series of payments that are backed by a set of mortgages. In this way there will be a flow of money from the payments made by each owner of his mortgage to the holders of these securities in the form of profitability and investment.
These mortgages are in the hands of an administrator of the issuing entity, who will be in charge of structuring (this process is called securitization ) the value and managing the aforementioned flow of money. This flow is known as “pass-through” in English, and it is the simplest way in which the interest and the principal of the mortgage are sent directly to the holders of this financial asset (after deducting the commissions or interests by of the administrator in the form of services and guarantee payment to the owners of the MBS).
The variety in which there are different options for an investor, in terms of risk return is found in the Collateralized Mortage Obligations (CMO). We would be talking about a more complex structure where according to the quality of the mortgages, they are grouped together and put a note (from the safest, that is, with low bankruptcy or default capacity to the least secure).
On the other hand, there are other types of financial assets where loans are securitized that have been conceived solely for the purchase of a house, they are called Residential mortage backed securities (RMBSs) . Therefore, they are securities backed by residential mortgages, they can already be conventional mortgages, loans, or subprime mortgages. Its operation is the same as in the MBS and the CMO, they are securitized in the same way to generate different tranches (depending on the quality of the mortgage) in order to give the investor the option of choosing according to their risk profile.