This was a financial innovation that has allowed banks to reduce risk in the issue of long term mortgage loans by repacking the loans and selling them as securities.

	Diversification.
	Short selling
	Mortgage Backed Securities
	ARM loans.

Expert Solution

Mortgage Backed Securities was a financial innovation that has allowed banks to reduce risk in the issue of long-term mortgage loans by repacking the loans and selling them as securities.

Mortgage backed securities (MBS) are basically investments that are backed by security (mortgage). It allows the banks to benefit from mortgage business without the hassle of buying or selling actual home loan.

Let us explain how MBS works!

First the bank makes a home loan. Then the back sells that loan to an investment bank and uses the money received from the investment bank to make new loans. It thus reduces the risks associated with long-term mortgage loans. The investment bank adds this loan to the list of mortgages with equivalent interest rates.

Rahul Sunny answered 2 years ago

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