What is a Mortgage Backed Security (MBS)?

A Mortgage Backed Security (MBS) is essentially a financial instrument that allows investors to earn returns based on the cash flows generated from a pool of mortgages. When mortgages are bundled together, they create an MBS, which is sold to investors. This investment vehicle receives income from the homeowner’s mortgage payments—both principal and interest.

In the context of Canada, MBS can indeed include pools of mortgages that are insured by the Canada Mortgage and Housing Corporation (CMHC). The insurance provided by CMHC can enhance the security of the investment, as it protects against default risks associated with the mortgages in the pool. By investing in MBS that are backed by insured mortgages, investors can receive regular income while also assuming a lower risk compared to directly holding individual mortgages. This understanding clarifies the unique characteristics of MBS as a form of investment, focusing on the income generated from a collection of underlying assets, rather than the properties themselves or equity stakes.