What are mortgage-backed securities?

Mortgage-backed securities (MBS) are investment products that represent claims on the cash flows generated by a pool of mortgage loans. Essentially, these securities are created when loans secured by real estate properties are bundled together and sold to investors. The cash flow from the mortgage payments made by homeowners (the borrowers) provides the returns for MBS investors.

The structure of mortgage-backed securities allows for the pooling of various mortgage loans, which can help spread risk across many investors instead of being concentrated in individual mortgages. The investors receive periodic payments that typically include both principal and interest, which come from the mortgage payments made by borrowers.

MBS can be an attractive investment because they often provide higher yields compared to government bonds and allow investors to gain exposure to the real estate market without having to directly invest in properties. Additionally, many mortgage-backed securities are issued or guaranteed by government-sponsored enterprises, which can add a layer of security and trust for investors. Overall, this makes option B the correct choice in defining what mortgage-backed securities are.