Stripped Mortgage-Backed Security (Stripped MBS)

Definition - What does Stripped Mortgage-Backed Security (Stripped MBS) mean?

Stripped mortgage-backed securities are mortgage-backed securities that are divided into two "strips." These strips consist of an interest strip and a principal strip. Investors can choose which strip they would like to invest in. In the context of the law, mortgage holders are legally obligated to repay the mortgage—that is where the cash flow comes from for the stripped mortgage-backed securities.

Justipedia explains Stripped Mortgage-Backed Security (Stripped MBS)

Stripped mortgage-backed securities are an alternative to other types of mortgage-backed securities that offer the principal and the interest in a combined format. These types of securities can be significantly influenced by current interest rates. Interest rates often change, and they can dramatically impact how much a borrower will have to pay in interest. This, in turn, can affect how much a potential investor would be paid in cash flow from the security.

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