Mortgage-backed securities (MBSs) are a type of investment that represents ownership in a group of mortgages. Principal and interest from the individual mortgages are used to pay principal and interest on the MBS.
Ownership in a group of mortgages is typically represented by a pass-through certificate (PC). Most pass-through certificates are issued by the Government National Mortgage Agency, a branch of the United States government, or by one of two private corporations: Fannie Mae or Freddie Mac. With these certificates, homeowners' payments pass from the originating bank through the issuing agency to holders of the certificates. These agencies also frequently guarantee that the certificate holder receives timely payment of principal and interest from the PCs.