I just can’t wrap my mind around this.
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A mortgage backed security is a share of a bundle of mortgages. The cash flows are assigned to a series of tranches. Institutional investors like them because they can buy the short cashflows or the long cashflows or default protected cashflows and tune their investments better. Tranche 1 might get the first 20% of principal payments, the next tranche gets the next 20% of payments. Etc. They all earn interest on their tranche until it gets fully redeemed. The disadvantage of MBS is that people tend to refinance and pay off their old, higher interest mortgage for a new one when interest rates drop.
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