Mortgage-Backed Securities (MBS) are financial products made by combining a number of individual residential or commercial mortgage loans. Financial organizations, including banks and mortgage lenders, combine these loans and offer them to investors as securities. Mortgages can be aggregated and sold to a group of individuals to package the loan in a secure way.

Every MBS is a claim on the cash flows from the underlying mortgage pool, which includes borrower-made principle and interest payments. Depending on how well the mortgage loans in the pool perform, investors in MBS get periodical payments; different MBS types provide varied risk and return profiles. Because they give mortgage lenders liquidity and let investors engage in the housing market without actually owning real estate, MBS are important players in the financial markets.

Banks can diversify their portfolios by investing in MBSs. A lender can sell a loan while retaining the right to service the mortgage, earning a profit by collecting the monthly payment and managing the account. As of 2021, the Federal Reserve is the largest MBS investor, holding $2.5 trillion in assets secured through a purchase program. MBSs offer regular income through interest and principal payments along with higher yields.

MBS and Whistleblowing

The subprime mortgage crisis played a significant role in the 2008 financial crisis. Subprime mortgages are loans issued to borrowers with poor creditworthiness, making them riskier. These risky loans were bundled into MBS, misrepresented as safe investments, and sold to unsuspecting investors. Whistleblowers within financial institutions could play a crucial role in exposing these fraudulent practices.

Banks approved mortgages for borrowers who wouldn’t qualify under normal circumstances, inflated the creditworthiness of borrowers to make subprime loans appear more attractive, and failed to properly assess the overall risk associated with MBS containing a high percentage of subprime loans.