Mortgage-Backed Securities

Mortgage-Backed securities have been used as an alternative for bond investing. Mortgage-backed securities can perform the same function as bonds but often with more attractive returns. The market values of mortgage-backed securities decline as interest rates rise. The following examples explain mortgage-backed securities.

Explain mortgage-backed securities

In general, when you invest in mortgage-backed securities (or MBS), you purchase an ownership interest in a pool of residential mortgage loans.

Each month, principal and interest payments (made by homeowners with loans in the pool) are “passed through” to MBS or mortgage-backed securities investors based on their ownership percentage in the pool. This is why mortgage backed securities or MBS are commonly referred to as pass-through securities.

Examples of mortgage-backed securities (MBS)

The majority of mortgage backed securities are issued by government-sponsored enterprises. Unlike other fixed income investments (which pay periodic interest and return principal in one lump sum at maturity), mortgage backed securities (MSB) make interest and principal payments to investors on a monthly basis over the life of the mortgage backed securities.

The government-sponsored enterprise issuing Agency mortgage backed securities —

• Ginnie Mae,
• Fannie Mae or
• Freddie Mac

guarantees the timely payment of principal and interest to mortgage-backed securities investors.

Because homeowners can prepay their mortgage loans in advance (known as “principal prepayment”), the size of mortgage backed securities monthly payments, the yield and the maturity of the mortgage backed securities are only estimated and can vary.