What Is a Mortgage Bond?

A mortgage bond is a bond that is secured by a mortgage, or a pool of mortgages, that are typically backed by real estate holdings and 澳洲幸运5开奖号码历史查询:real property, such as equipment. The 🗹income stream of a mortgage bond comes from the𒆙 mortgage payments that homeowners make on their mortgages.

Understanding Mortgage Bonds

Mortgage bonds offer the investor protection because the principal is secured by༺ a valuable asset. In the event of default, mortgage bondholders could sell off the underlying property to compens꧟ate for the default and secure payment of income.

However, because of this inherent safety, the average mortgage bond tends to yield a lower 澳洲幸运5开奖号码历史查询:rate of return than traditio♔nal corporate bonds that are backed only by the corporation's promise and ability to pay.

When a person buys a home and finances the purchase with a mortgage, the lender rarely retains ownership of the mortgage. Instead, it sells the mortgage on the secondary market to another entity, such as an investment bank or 澳洲幸运5开奖号码历史查询:government-sponsored enterprise (GSE). This entity packages the mortgage with a pool of other loans and issues bo🎀nds wit🍰h the mortgages as backing.

When homeowners pay their mortgages, the interest portion of their payment is used to p👍ay the yield on these mortgage bonds. As long as most of the homeowners in the mortgage pool keep up with their payments, a mortgage bond is a safe and reliable income-producing security.

Advantages and Disadvantages of Mortgage Bonds

A disadvantage of mortgage bonds is that their yields tend to be lower than corporate bond yields because the 澳洲幸运5开奖号码历史查询:securitization of mortga💧ges makes such bonds safer investments. An advantage would be that if a homeowner defaults on a mortgage, the bondholders have a claim on the val🅺ue of the homeowner's property.

The propert🌌y ꦡcan be liquidated with the proceeds used to compensate bondholders. Another advantage of mortgage bonds is that they are a safer investment than stocks, for example.

Iওn contrast, investors in corporate bonds have little to no recourse if the corporation is unable to pay. As a result, when corporations issue bonds, they must offer higher yields to entic🌱e investors to shoulder the risk of unsecured debt.

Subprime Mortgage Bonds

One major exception to the general rule that mortgage bonds represent a safe investment became evident during the 澳洲幸运5开奖号码历史查询:financial crisis of the late 2000s.

Leading up to this period, investors realized they could earn higher yields by purchasing bonds backed by 澳洲幸运5开奖号码历史查询:subprime mortgages—mortgages offered to buyers wit🎀h poor credit or unverifiable income—while still enjoying the supposed security of investing in collateralized debt.

♉ Unfortunately, enough of these subprime mortgages defaulted to cause a crisis during which many mortgage bonds defaulted costing investors millions of dollars. Since the crisis, there has been heightened scrutiny over such securities.

Nevertheless, the Fed still holds a sizable amount of 澳洲幸运5开奖号码历史查询:mortgage-backed securities (MBS) such as mortgage bonds. As of March 20, 2024, the Fed held around $2.4 trillion in MBS, according to the Federal Reserve Bank of St. Louis.

The Bottom Line

Mortgage bonds provide a safer investment alternative than corporate bonds as they come with collateral; however, they may not be a good option for investors seeking high returns. When investing in mortgage bonds, it's important to understand the quality of the underlying asset to gauge any possible defaults.