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官方开奖结果体彩网:real property, such as equipment. The income ﷺstream of aꦗ mortgage bond comes from the 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 assetไ. In the event of default, mortgage bondholders could sell off the underlying property to compensate 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官方开奖结果体彩网:rate of return than traditional corporate bonds that are backed only by the corporꦍation'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官方开奖结果体彩网:government-sponsored enterprise (GSE). This entity packages☂ the mortgage with a pool of other loans and issues bonds with the mortgages as backing.

When homeowners paඣy their mortgages, the interest portion of their payment is used to pay 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官方开奖结果体彩网:securitization of mortgages makes such bonds safer investments. An advantage🃏 would be that if a homeowner defaults on a mortgage, the bo𓆏ndholders have a claim on the value of the homeowner's property.

The property can be liquidated with the proceeds used to compensat꧒e bondholders. Another advantage of mortgage bonds is that they🐼 are a safer investment than stocks, for example.

In contrast, investors in corporate bond🐟s have little to no recourse if the corporation is unable to pಌay. As a result, when corporations issue bonds, they must offer higher yields to entice 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官方开奖结果体彩网: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官方开奖结果体彩网:subprime mortgages—mortgages offered to buyers with poor credit or unverifiable income—while still enjoying the suppose🍃d 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官方开奖结果体彩网: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.