Mortgage-Backed Security (MBS) is a pool of mortgage investment in which the investors obtain payments on a timely basis. These investments are guaranteed by a government agency.
In Canada, the Central Housing and Mortgage Corporation (CMHC) guarantee such investments through the National Housing Act. In the US, the Fannie Mae, Freddie Mac, and Ginnie Mae guarantee such investments. Since the government agencies guarantee such investments, these types of investment are highly safe.
Long time ago, only the wealthy with large financial assets can get involve in such investments. With the introduction of Mortgage-Back Security, more people can get involve in such investments. An initial investment can go as low as five thousand dollars.
That is why these investments are getting popular. At this time, the total investments on Mortgage-Backed Security run in the billions of dollars. Although these investments are relative safe, the investors can encounter three kinds of risks.
First, the default risks are encounter when the borrower fails to make mortgage payment. Second, the interest rate risks are encounter when the borrower refinances to a lower interest rate. Finally, the prepayment risks are encounter when the borrower pays extra on the mortgage payments to pay off mortgage early.
The Private Mortgage Insurance (PMI), or Mortgage Insurance softens the blow for the default risks. In case the borrower misses mortgage payment, the PMI resolves the default risks.
The Insurance Company, Chartered Banks, Trust Company, Loan Company, Credit Unions, and Mortgage Lenders can offer Mortgage-Backed Security (MBS). The MBS can be open or close. The borrower can prepay the mortgage on open, while the borrower can not prepay the mortgage on close.
Mortgages are also on a variety of mortgage terms. For example, 6 months, 2 years, 3 years, or 5 years are common mortgage terms.
MBS are available for exclusive homeowner, multi-family, social housing, or combinations. Social Housing is housing co-ops, and senior housing.
In Canada, the MBS are currently eligible for RRSP, and RRIF. The RRSP and RRIF are tax-sheltered retirement investment fund.
The MBS is relative safe investment, because the government agencies guarantee the timely payment or profit. And, the profits are comparable to GIC, and Bonds. It is an investment that is worth to consider.