Legal Definitions - stripped mortgage-backed security

A stripped mortgage-backed security is a type of security that is created by separating the interest and principal payments of a mortgage-backed security into two separate securities. The interest payments are sold as one security, while the principal payments are sold as another security.

For example, let's say there is a mortgage-backed security that has a total value of $100,000. The interest payments on the mortgage are $5,000 per year, while the principal payments are $95,000. The issuer of the security can create two separate securities: one that pays the $5,000 in interest each year, and another that pays the $95,000 in principal when the mortgage is paid off.

The stripped mortgage-backed security allows investors to choose which type of payment they want to receive. Some investors may prefer the steady income from the interest payments, while others may prefer the lump sum payment of the principal when the mortgage is paid off.

Overall, the stripped mortgage-backed security is a way for investors to customize their investments based on their individual preferences.