What are mortgage securities ?
Mortgage securities represent an ownership interest in mortgage loans made by financial institutions to finance the borrower’s purchase of a home or other real estate.
Mortgage securities are created when these loans are packaged, or “pooled,” by issuers or servicers for sale to investors.
Investors may purchase mortgage securities when they are issued or afterward in the secondary market.
The majority of mortgage securities are issued or guaranteed by agency of the US Gov ,Ginnie Mae (Government National Mortgage Association) or by government-sponsored enterprises (GSEs) such as Fannie Mae (Federal National Mortgage Association) and Fredie Mac (Federal Home Loan Mortgage Corporation), known as “agency” mortgage securities.
Ginnie Mae is a government-owned corporation within the Department of Housing and Urban Development.
These agencies buy qualified mortgage loan or guarantee polls of such loans originated by financial institutions, securitize the loan, and distribute the securities through the dealer community
Some private institutions also package various types or mortgage loans and mortgage pools, known as “private label” mortgage securities.
Mortgage Securities VS Fixed Income Securities ?
Investors in Fixed-Income Securities earn coupon rate over the life of the bond then receives a repayment of principal in a single lump sum when the bond matures.
While, investors in mortgage securities earn a coupon rate, but receives repayments of the principal in increments over the life of the security, as the underlying mortgage loans are paid off.
The cash flow on mortgage securities is irregular, since homeowners refinance their loans to take advantage of lower interest rate or prepay their mortgage for some other reason.
Mortgage securities are sold and traded in terms of their assumed “average life” rather than their maturity dates. The average life is the average amount of time that will elapse from the date of MBS purchase until principal is repaid based on assumed prepayment forecast.