The return offered by mortgage-backed securities (MBS) is among the best of all fixed-rate investments. They typically pay a higher return than other government bonds, such as T-bonds and T-notes. In fact, they usually offer rates slightly better than investment-grade corporate bonds.
Although rates can vary depending on the circumstances, as a general rule of thumb, a Ginnie Mae MBS pays a yield of about 1 to 2 percentage points higher than a Treasury Issue with the same maturity.
An MBS from Fannie Mae or Freddie Mac pays even more, since they are considered slightly riskier than a Ginnie Mae MBS. They pay a yield of about 15 to 50 basis points percent higher than a Ginnie Mae MBS. However, the average annual total return from mortgage-backed securities still falls several percentage points below 10.7 percent average annual return of the stock market. But mortgage-backed securities are much safer and more predictable than stocks.
Mortgage-backed securities are considered very safe. They are guaranteed by the issuer, and because they are made up of pools of mortgages, their return is not based on a single mortgage holder. Ginnie Mae securities are technically the safest of all MBS options because they are guaranteed by Ginnie Mae, which is a wholly owned government corporation backed by the full faith and credit of the United States.
Securities issued by Fannie Mae and Freddie Mac are also guaranteed, but not by the full faith and credit of the U.S. government. Fannie Mae and Freddie Mar are publicly traded corporations originally set up by the U.S. Congress. They guarantee the timely payment of all principal and interest of the mortgage-backed securities they issue. Although their guarantee doesn't carry the weight of the U.S. government, Freddie Mac and Fannie Mae are two of the most fiscally sound corporations in America. Their MBS are considered to be the equivalent of AAA-rated corporate bonds. They have never defaulted on a mortgaged-backed security.
There are several important benefits of owning mortgage-backed securities. Safety and a steady stream of income are the most obvious, but there are some other benefits, as well, such as:
- Excellent interest rates. The interest they pay is higher than the rate offered by other government bonds and most investment grade corporate bonds.
- Liquidity. There is a huge secondary market for mortgage-backed securities, so you can buy and sell them whenever you wish. If you don't want to hold them through maturity, it's easy to find a buyer on the secondary market.
- Easy to buy. They are easy to buy and an be purchased through your bank or your broker.
- Safety. Because of the guarantees that come with mortgage-backed securities, they are considered very safe investments.
