Mortgage-backed securities are created by pooling which type of assets?

• A. Student loans
• B. Auto loans
• C. Credit card debt
• D. Mortgage loans

Answer: (D)

Mortgage-backed securities are created by pooling mortgage loans. By combining many individual home (or other real estate) loans with similar terms, issuers create a single security whose cash flows come from the borrowers’ monthly mortgage payments. After accounting for servicing fees, those payments are distributed to investors, providing a predictable stream of income. The resulting instrument can be a simple pass-through, where investors share in the payments proportionally, or a more complex structure like a collateralized mortgage obligation that slices the risk and timing into tranches. This concept hinges on the underlying collateral being mortgage loans, rather than other loan types. While student loans, auto loans, and credit card debt can be securitized as asset-backed securities, they are not mortgage-backed securities because their pools are not mortgages.