Since the Z-spread uses the entire yield curve to value the individual cash flows of a bond, it provides a more realistic valuation than an interpolated yield spread based on a single point of the curve, such as the bond's final maturity date or weighted-average life.
However, the Z-spread does not incorporate variability in cash flows, so a fuller valuation of an interest-rate-dependent security often requires the more realistic (and more complicated) option-adjusted spread (OAS).
The Z-spread of a bond is the number of basis points (bp, or 0.01%) that one needs to add to the Treasury yield curve (or technically to Treasury forward rates) so that the Net present value of the bond cash flows (using the adjusted yield curve) equals the market price of the bond (including accrued interest).
This gives a single series of nominal cash flows as if the MBS were a riskless bond.
This difference arises because the MBS market price incorporates additional factors such as liquidity and credit risk and embedded option cost.