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TheStreet Open House

Booyah Breakdown: MBS 101

As a special feature for April, TheStreet.com offers a 20-part series on virtually everything to do with real estate. Today's installment is part one.

These days, if we're not talking about the paternity of Anna Nicole Smith's baby, we're talking about the subprime mortgage market.

That's probably why our Subprime 101 story got a ton of email and bunch of great questions.

And it seems that many of you had questions about the mortgage-backed securities that ultimately end up holding these subprime loans.

So the Booyah Breakdown is going to tackle that today. Welcome to MBS 101! (Do you feel like a freshman in college again?)

What Is a Mortgage-Backed Security?

The technical definition of a mortgage-backed security, or MBS, is that it's a securitized interest in a pool of mortgages. More simply put, it's like a bond and, instead of paying investors a fixed coupon and principal, an MBS pays out principal and interest payments from the mortgages in the pool.

Here's how it all works.

Joe Borrower walks into Local Bank because he needs a loan to buy a house.

Joe gives the bank enough information to prove he can afford the loan. Local Bank then checks Joe's credit (salary, assets, etc.) and establishes the worth of the property through an appraisal. Joe and Local Bank negotiate and establish the terms of the loan, such as the interest rate, the amortization of principal as well as the prepayment terms.

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