Mortgage Backed Securities Chart: A Comprehensive Guide

Mortgage backed securities (MBS) are financial instruments that are backed by a pool of mortgages. They are a popular investment vehicle for institutional investors, and they play a key role in the functioning of the housing market.

What are Mortgage Backed Securities?

MBSs are created when a group of mortgages is pooled together and sold to investors in the form of bonds. The principal and interest payments on the underlying mortgages are then used to make payments to investors in the MBS.

MBSs are typically issued by government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac. These GSEs guarantee the timely payment of principal and interest on MBSs, which makes them a very safe investment for investors.

How Do Mortgage Backed Securities Work?

The process of creating and issuing MBSs is as follows:

1. A group of mortgages is originated by a lender.
2. The mortgages are sold to a GSE.
3. The GSE pools the mortgages together and issues MBSs backed by the pool of mortgages.
4. Investors purchase the MBSs.
5. The principal and interest payments on the underlying mortgages are used to make payments to investors in the MBSs.

Types of Mortgage Backed Securities

There are two main types of MBSs:

• Pass-through MBSs: These MBSs represent a direct interest in the underlying pool of mortgages. Investors in pass-through MBSs receive a portion of the principal and interest payments on the underlying mortgages.
• Collateralized mortgage obligations (CMOs): These MBSs are created by dividing the underlying pool of mortgages into different classes, each with its own risk and return profile. Investors in CMOs receive payments from a specific class of mortgages.

Benefits of Mortgage Backed Securities

MBSs offer a number of benefits to investors, including:

• Safety: MBSs are backed by the full faith and credit of the GSEs, which makes them a very safe investment.
• Diversification: MBSs provide investors with diversification benefits because they are backed by a pool of mortgages, rather than a single mortgage.
• Liquidity: MBSs are traded on the secondary market, which makes them a liquid investment.
• Yield: MBSs typically offer higher yields than other fixed-income investments.

Risks of Mortgage Backed Securities

There are also some risks associated with investing in MBSs, including:

• Interest rate risk: The value of MBSs can decline if interest rates rise.
• Prepayment risk: The value of MBSs can decline if the underlying mortgages are prepaid.
• Credit risk: The value of MBSs can decline if the underlying mortgages default.

Common Mistakes to Avoid When Investing in Mortgage Backed Securities

There are a number of common mistakes that investors make when investing in MBSs, including:

• Investing in MBSs without understanding the risks. It is important to understand the risks associated with investing in MBSs before you invest.
• Investing in MBSs that are not suitable for your investment objectives. MBSs are not suitable for all investors. It is important to choose MBSs that are appropriate for your investment goals and risk tolerance.
• Investing in MBSs that are not properly diversified. It is important to diversify your investments across a variety of asset classes, including MBSs.

How to Invest in Mortgage Backed Securities

If you are interested in investing in MBSs, there are a number of ways to do so. You can:

• Purchase MBSs directly from a broker or dealer.
• Invest in MBSs through a mutual fund or exchange-traded fund (ETF).
• Invest in MBSs through a collateralized mortgage obligation (CMO).

Conclusion

Mortgage backed securities are a complex investment product, but they can be a valuable addition to a diversified investment portfolio. By understanding the risks and rewards of investing in MBSs, you can make informed investment decisions.

Table 1: Key Statistics on Mortgage Backed Securities

Table 2: Types of Mortgage Backed Securities

Table 3: Benefits of Mortgage Backed Securities

Table 4: Risks of Mortgage Backed Securities