How do MBS tranches work?

An MBS is made of multiple mortgage pools that have a wide variety of loans, from safe loans with lower interest rates to risky loans with higher rates. ... Therefore, tranches are made to divide up the different mortgage profiles into slices that have financial terms suitable for specific investors.

Are MBS collateralized?

Each package becomes an MBS that can be purchased by investors. The mortgages properties act as collateral, providing backing for the security. Often, small regional banks sell their mortgages as a means of raising money to fund other mortgages or loans.