1. 20 Investments: Introduction
  2. 20 Investments: American Depository Receipt (ADR)
  3. 20 Investments: Annuity
  4. 20 Investments: Closed-End Investment Fund
  5. 20 Investments: Collectibles
  6. 20 Investments: Common Stock
  7. 20 Investments: Convertible Security
  8. 20 Investments: Corporate Bond
  9. 20 Investments: Futures Contract
  10. 20 Investments: Life Insurance
  11. 20 Investments: The Money Market
  12. 20 Investments: Mortgage-Backed Securities
  13. 20 Investments: Municipal Bonds
  14. 20 Investments: Mutual Funds
  15. 20 Investments: Options (Stocks)
  16. 20 Investments: Preferred Stock
  17. 20 Investments: Real Estate & Property
  18. 20 Investments: Real Estate Investment Trusts (REITs)
  19. 20 Investments: Treasuries
  20. 20 Investments: Unit Investment Trusts (UITs)
  21. 20 Investments: Zero-Coupon Securities
  22. 20 Investments: Conclusion

What Is it?
A mortgage-backed security (MBS), also known as a "mortgage pass-through" or a "pass-through certificate", is an investment instrument that represents ownership of an undivided interest in a group of mortgages. Principal and interest from the individual mortgages are used to pay principal and interest on the MBS.

When you invest in a mortgage-backed security, you are lending money to a homebuyer or a business. MBSs are a way for small regional banks to give mortgages to their customers without having to worry if they have the assets to cover the loan. Instead, the bank acts as an intermediary between the homebuyer and the investment markets.

Who pools these mortgages together? The majority of MBSs are issued and backed by government-sponsored corporations such as the Government National Mortgage Association (Ginnie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae). Each entity offers a slightly different variation in the securities it issues. Ginnie Mae MBSs are typically the most popular and widely held because they are backed by the U.S. government, whereas Fannie Mae is government sponsored but also trades as a public company.

Objectives and Risks
Mortgage-backed securities are an undiscovered gem. While these securities are primarily used to provide safe income, there is also the opportunity to get some capital appreciation as interest rates fall. Another advantage to MBSs is that they are very suitable for most tax-deferred savings accounts.

Generally, MBSs are traded actively, much like bonds are, so there is very little liquidity risk. Furthermore, they are considered an extremely safe investment, often said to have the same credit worthiness as treasuries but with a return that is 1-2% greater. Monthly income from MBSs can vary as interest rates change because mortgages can be prepaid, and when interest rates are falling, prepayments tend to rise. Prepayments only shorten the life of the MBS and are passed directly to the investors.

How To Buy or Sell It
Mortgage-backed securities can be purchased at almost any full-service broker. More and more discount brokers are offering MBSs as well. These securities don't come cheap - most are sold in chunks of $25,000. But there are some variations of MBS (called collateralized mortgage obligations, or CMOs) that can sell for under $5,000.

  • Very low-risk investment that offers a return that\'s 1-2% higher than comparable low-risk securities.
  • Most MBSs are either fully backed or sponsored by the <?xml:namespace prefix = st1 />U.S. government.
  • Minimum investment can be fairly high, upwards of $25,000.
  • Outside of a retirement account, there are virtually no tax advantages to owning an MBS. The income from an MBS is taxed as regular income.
Three Main Uses
  • Provide Income
  • Capital Appreciation
  • Tax-Deferred Savings

20 Investments: Municipal Bonds
Related Articles
  1. Investing

    What Happened To The MBS Market?

    Find out how the fall of mortgage-backed securities has changed the financial landscape.
  2. Personal Finance

    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 through the process of securitization, in which the underlying assets ...
  3. Investing

    The ABCs of Mortgage-Backed Securities ETFs

    ETFs focused on mortgage-backed securities, or MBS, offer an opportunity to further diversify the fixed-income portion of your portfolio.
  4. Investing

    Profiting Off of Increased Mortgage Rates (PTRIX,FMSFX,VMBSX)

    Learn why mutual funds that invest in mortgage-backed securities (MBS) are worth a look for investors wanting to capitalize on rising mortgage interest rates.
  5. Personal Finance

    Behind the Scenes of Your Mortgage

    Four major players slice and dice your mortgage in the secondary market.
  6. Investing

    Top 3 Mortgage Backed Securities (MBS) ETFs (MBB, MBG)

    Discover some of the best opportunities for investors seeking exposure to mortgage-backed securities through utilizing exchange-traded funds.
  7. Investing

    The Most Important Factors that Affect Mortgage Rates

    Discover what the most important factors are that affect mortgage interest rates. Factors range from inflation and economic growth to Federal Reserve activity, .
  8. Personal Finance

    Profit From Mortgage Debt With MBS

    Mortgage-backed securities can offer monthly income, a fixed interest rate and even government backing.
  9. Insights

    The Mortgage-Backed Security Market Faces Major Tumoil

    The Fed is expected to begin selling off its $1.75 trillion portfolio of mortgage-backed securities.
  10. Investing

    Fannie Mae: What It Does And How It Operates

    Chances are that you've heard of Fannie Mae. But do you know what it does and how it operates?
Frequently Asked Questions
  1. How do you calculate r-squared in Excel?

    Calculate R-squared in Microsoft Excel by creating two data ranges to correlate. Use the Correlation formula to correlate ...
  2. What is the Difference Between International Monetary Fund and the World Bank?

    Learn about the International Monetary Fund and the World Bank and how they are differentiated by their respective functions ...
  3. Where Did the Bull and Bear Market Get Their Names?

    The terms bull and bear are used to describe general actions and attitudes, or sentiment, either of an individual (bear and ...
  4. What's the difference between Google's GOOG and GOOGL stock tickers?

    Learn the difference between Google's GOOG and GOOGL ticker symbols. Splitting shares into classes prevents management from ...
Trading Center