There are several factors that makes MBS an attractive investment:

1) MBS has two type: agency and non-agency mortgage pools backed. The agency bakced has less credit risk than non-agency one, but has higher yield than US Treasury due to the credit risk; Thus, MBS is a better choice for investors who want to seek higher yields without taking too much risk.

2) CDO backed by MBS are tranched in capital structure. Investors who are risk-averse can buy senior and hedge funds are common buyers of equity tranch.

3) the bank who issued mortgage in first place is more focuing on earning the service spread;

Using a mortgage of $100k as an example, the mortgage is 30 year and rate is 6%. While 30 year T-bond is 4%, so typical CDO will look like following:

Bank: service spread 0.5%

Senior $80K yield at 4.5%;

Mezz.  $15K yield at 5%;

Equity gets remaining value;

Hope it will help you to understand MBS!