Definition of mortgage-backed securities

investment grade securities backed by a pool of mortgages or trust deeds. Principal and interest payments on the underlying mortgages are used to pay semiannual interest and principal on the securities. Income from the principal and interest payments on the underlying mortgages are used to pay off the bonds.

Most mortgage-backed securities, such as Collateralized Mortgage Obligation and Real Estate Mortgage Income Conduit , consist of multiclass obligations that are divided into different classes of bonds to appeal to different investor needs. Because some mortgage pools will pay off faster than others, mortgaged-backed securities are typically issued as a series of several different bonds, each having a different maturity date.