Mortgage Backed Securities

Although investing in mortgage backed securities isn’t meant to be a philanthropic venture, one of the nice things about investing in them is that you will actually be helping someone to finance their home! Actually, mortgage backed securities are debt obligations (mortgages) that have been purchased from a mortgage company, bank or other financial institution and placed into a pool so that investors can receive periodic payments on their investment.

What Is a Mortgage Backed Security?
Often referred to as MBS, mortgage backed securities are backed with assets, namely one or more mortgages. The mortgages are placed in a pool from which periodic payments are made to investors from profits made as the loans are paid. Some people find that this type of investment instrument offers a great deal of opportunity for ongoing income while the pool continues to hold the mortgages.

What Type of Mortgages Go Into the Pool?
Most often the mortgages in mortgage backed securities are home loans. Of course the purpose of investing is to make a profit on your investment, but many people would not actually qualify for a home loan if the bank or financial institution wasn’t sure they would be able to turn around and sell those mortgages to a securities pool. In turn, the lender will then approve more loans which will later be sold to that or another mortgage backed securities pool. In this way, many more people are able to be financed.

Government Sponsored Mortgage Backed Securities
Actually, most mortgage backed securities have been issued by an agency of the United States government, Fannie Mae (Federal National Mortgage Association), Ginnie Mae (Government National Mortgage Association) or Freddie Mac (Federal Home Loan Mortgage Corporation). Because Ginnie Mae is backed by the federal government investors feel safe (and are guaranteed!) in the fact that they will receive timely payments. While Freddie Mac has a certain amount of guarantees, they are not backed by the government in the same way that Ginnie Mae is. On the other hand, they do have the ability to borrow from the United States Treasury when needed to make those payments. However, there are some private brokerages, homebuilders and banks that also offer private label mortgage securities.

Keeping Small Banks in Business
As mentioned above, mortgage backed securities do enable a greater number of people to obtain mortgages but they also help keep smaller banks and financial institutions in business. Many small banks would be reluctant to provide mortgage loans if they couldn’t be assured that the money would be forthcoming from these mortgage backed securities pools. Since their own assets are limited they understandably worry whether or not the borrower will continue to have the ability to make payments. Because these smaller financial institutions know that investors will buy the mortgages they continue to lend money confidently.

Where to Find Mortgage Backed Securities
You can find pools to invest in by contacting Ginnie Mae, Freddie Mac or Fannie Mae if you are interested in a government sponsored mortgage backed securities pool or you can do an online search for a private label mortgage backed securities pool. While many investors are skittish in regard to mortgages after the market meltdown of 2008 and 2009, the market is rebounding and many analysts predict this will be a profitable venture from here on out.

Even if you are looking to invest in mortgage backed securities (which of course you are!) to make a profit you will be doing something good for both borrowers and lenders as well. Mortgage backed securities are vehicles through which the mortgage market is able to continue growing and providing loans to greater numbers of people.

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