Mortgage rates are derived by the buying and selling of mortgage bonds, more specifically mortgage-backed Securities. So what is a mortgage-backed security? Mortgage-backed security, or a MBS, are investments, somewhat similar to stocks, bonds or mutual funds. Their value is secured, or backed, by the value of an underlying bundle of mortgages. When you buy a MBS, you aren't buying any actual mortgage. Instead, you are buying a promise to be paid the return that the bundle of mortgages will receive. An MBS is considered a derivative, because its value is derived from the underlying asset, in this case mortgages.