Why You Should Consider Investing In Mortgage Backed Securities Today

Also known as MBSs, these are bonds secured by a mortgage (or more than one mortgage), on a home or any other real estate. A group of mortgages are put together and sold to a group of of individuals - probably a federal government agency, a government sponsored entity, an investment group or a bank – and the resulting security is sold to investors.

Most MBSs are issued via a US government agency or government-sponsored enterprise such as Fannie Mae. For former is backed by the US government, but the latter is not. The buyer is guaranteed interest and principle payments.

Most common MBSs

Pass-throughs are basic versions of MBSs, where mortgage payments are passed onto investors. Maturity is 5, 15 or 30 years.

Collateralized mortgage obligations (or CMOs) are more complicated and made up of many groups of securities, each with its own rules. These are for experienced and knowledgeable investors only.

What it means for investors

In its simplest form, an MBS means you are effectively lending money to a homeowner or a business owner. The bank (or any one else) acts as the middle man. As an investor you receive monthly payments of interest and principal. MBSs got a bad rep after the financial crisis of 2008, but don’t let that put you off - they can still be a good investment. Bear in mind MBSs can be complicated and they can be risky, especially CMOs. Though most are backed by the government, some are not. Make sure you have done your research before investing.