What are the best ways to invest in mortgage-backed securities (MBS)?

By Jean Folger AAA
A:

Mortgage-backed securities (MBS) are debt obligations that represent ownership of an undivided interest in a group of mortgages. Mortgage loans are bought from banks, mortgage companies and other loan originators, and then assembled into pools by various government or private entities. The entities subsequently issue securities, which are then purchased by private investors, that represent claims on the principal and interest payments made by borrowers on the loans that comprise the pool, a process known as securitization.

Most mortgage-backed securities are issued by Ginnie Mae (the Government National Mortgage Association), Fannie Mae (the Federal National Mortgage Association) or Freddie Mac (the Federal Home Loan Mortgage Corporation), all U.S. government-sponsored enterprises. MBS from Ginnie Mae are backed by the full faith and credit of the United States, which guarantees that investors receive full and timely payments of principal and interest. Fannie Mae and Freddie Mac MBS are not backed by the full faith and credit of the U.S. government, but both have special authority to borrow from the U.S Treasury if necessary. Other private institutions, including brokerage firms, banks and homebuilders securitize mortgages; these products are known as "private-label" mortgage securities.

Mortgage-backed securities can be purchased at most full-service brokerage firms and some discount brokers. The minimum investment is typically $25,000; however, there are some MBS variations (collateralized mortgage obligations, or CMOs) that can be purchased for less than $5,000. Investors who don't want to invest directly in a mortgage-backed security but who want exposure to the mortgage market may consider mortgage funds - exchanged-traded funds (ETFs) that invest in mortgage-backed securities. Examples include SPDR Barclays Mortgage Backed Bond ETF (MBG); iShares MBS ETF (MBB), and Vanguard Mortgage-Backed Securities Index ETF (VMBS). ETFs trade just like stocks on regulated exchanges, and can be sold short and purchased on margin. And, like stocks, ETF prices fluctuate throughout each trading session in response to market events and investor activity.

 

RELATED FAQS

  1. Are mortgage-backed securities backed by any guarantees?

    Actually, any mortgage-backed security (MBS) guarantee depends on who issued it.To review, an MBS is a security, created ...
  2. What is the lowest capitalization rate before an investment becomes unprofitable?

    Learn about different levels of profitability associated with investments featuring similar capitalization rates. Explore ...
  3. Are APRs different in different countries?

    Learn about the term APR and how it is used in the United States and other countries. Explore why different lenders charge ...
  4. What loans do and don't have an APR?

    Learn about what annual percentage rates (APR) are and what they mean. Explore different fixed and variable APRs charge by ...
RELATED TERMS
  1. Mortgage-Backed Security (MBS)

    A type of asset-backed security that is secured by a mortgage ...
  2. Lehman Brothers Mortgage-Backed Securities Index

    An index made up of mortgage-backed securities that is used for ...
  3. Total Annual Loan Cost (TALC)

    The projected total cost that a reverse mortgage holder should ...
  4. Discounted Payoff

    The repayment of a loan in an amount that is less than the principal ...
  5. Business Broker

    A professional who specializes in the purchase and sale of companies. ...
  6. Forbearance

    A temporary postponement of mortgage payments.

You May Also Like

Related Articles
  1. Bonds & Fixed Income

    Introduction To Asset-Backed And Mortgage-Backed ...

  2. Bonds & Fixed Income

    The Risks Of Mortgage-Backed Securities

  3. Stock Analysis

    Why REITs Remain A Great Place To Put ...

  4. Credit & Loans

    Buying A House? Avoid These 7 Mistakes

  5. Professionals

    Should Your Retiring Clients Pay Off ...

Trading Center