A mortgage backed security is an investment method in which the bank acts as an intermediary between the investors and house owners. The companies who want to invest in mortgage-backed securities give banks to money and banks issue mortgage-backed securities to the investor. The bank then issues mortgages to homeowners at an interest rate slightly above the promised rate of return to the investors and keeps the profit.
The excessive usage of mortgaged back securities was one of the biggest causes of the European debt crisis. The mortgage-backed securities were issued against the excessive mortgages with a huge number of mortgage defaulters that were waiting to unload the huge default burden on the financial institutions. That ultimately cracked the backbone of the banking system.
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