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 are the requirements for an FHA loan?

    Qualify for homeownership with an FHA-backed mortgage. Borrowers with imperfect credit benefit from this government-sponsored ...
  3. What does FNMA stand for?

    Learn what FNMA is, how it helps low-, moderate- and middle-income families afford a place to live using mortgage liquidity, ...
  4. How are real estate taxes calculated?

    Find out how real estate taxes are calculated; failure to pay these taxes that can be a substantial annual expense can lead ...
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. Business Broker

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

    A temporary postponement of mortgage payments.
  5. Mortgage Modification

    A permanent change in a homeowner's home loan terms that makes ...
  6. Warranty of Title

    A guarantee by a seller to a buyer that the seller has the right ...
comments powered by Disqus
Related Articles
  1. Introduction To Asset-Backed And Mortgage-Backed ...
    Bonds & Fixed Income

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

  2. The Risks Of Mortgage-Backed Securities
    Bonds & Fixed Income

    The Risks Of Mortgage-Backed Securities

  3. Finding And Investing In FHA Condos
    Investing Basics

    Finding And Investing In FHA Condos

  4. Saving Money Or Paying Off Debt?
    Credit & Loans

    Saving Money Or Paying Off Debt?

  5. How To Refinance If Your Home Appraisal ...
    Home & Auto

    How To Refinance If Your Home Appraisal ...

Trading Center