The term “mortgage-backed securities” (MBS) refers to one type of an asset-backed investment that is collateralized by home loans. MBSs allow investors to profit from the mortgage industry without actually purchasing real estate. Both prospective investors and homeowners should familiarize themselves with mortgage-backed securities as they can greatly aid in growing wealth. Here’s what you should know.
An in-depth look at mortgage-backed securities
A mortgage-backed security is a pool of mortgages that is then offered to an investor group or bank. First, the lending agency sells mortgage loans at a discount to get packaged as an MBS. The MBS is then sold to investors as a bond, secured by collateral. Since there is a tangible security backing the bond, investors are more inclined to view MBS as safe options.
A mortgage-backed security can be purchased through a broker and investment minimums vary. The bank selling the MBS becomes the intermediary between the home owner and investment industry. The lending party (i.e., bank or private lender) can give its customers a mortgage with a good interest rate, then sell the loan to be included in an MBS. The bank counts the sale as a satisfied loan and is off the hook if the homebuyer defaults on its mortgage.
Everyone benefits when all parties work together
MBS can benefit all three parties involved, when everyone holds up their end of the deal. The lender must maintain quality standards for home loans, the homeowner needs to make its payments on time, and the credit rating agencies are thorough when reviewing the MBS.
In order to be sold, a market backed security can only be issued by a private financial institution or government-sponsored agency. The credit rating agency must grant one of the two top ratings to an MBS in order for it to be a legitimate investment and sellable.
Types of mortgage-backed securities
Pass-throughs and collateralized mortgage obligations (CMOs) are the two most frequently sold types of MBS. Investors in pass-through mortgages collect matured payments periodically, typically every 5, 15, or 30 years. CMOs offer investors tranches, or portions of the securities that return funds based on credit ratings.
How do mortgage-backed securities affect rates?
The price of a mortgaged-backed security affects your home loan rate, and these prices are in a constant state of flux. Your lending institution is monitoring the price of MBS and adjusting their rates accordingly. When MBS prices fall, home loan interest rates rise. The price of an MBS may fall for a number of reasons, including stock market gains, a drop in gold prices, higher energy costs and more.
When the price of mortgage back securities starts to rise, it’s usually good news for those seeking a home mortgage. While the rise of MBS cost can often link to economic uncertainty and a general downturn, it is helpful to those seeking low mortgage rates.
By Michaela Phillips. Michaela is the Senior Lender for Synergy One Lending. She enjoys teaching her clients the pros and cons of being a Real Estate Investor. Contact Michaela at 303.579.5517, e-mail [email protected] or visit michaelaphillips.com. NMLS: 312874.