“Mortgage Backed Securities” by Justin Adams is a fantastic book just for the fact that it is 30 pages long. After reading an almost 400-page book over the last week, it is great to find a short book.
Mortgage backed securities are mortgage loans that banks group together and sell like bond-like securities. You will have to understand some bond terms to get the most out of the experience.
Most mortgages are backed by Fannie Mae or Freddie Mac, which are government agencies. So the loans that conform to these agencies are rock solid. You can receive a higher yield from MBS than treasury bonds, in most cases. Let’s get into my five takeaways.
1) You can buy Mortgage backed securities in increments of $25,000 for Ginnie Mae loans and $1,000 for Freddie Mac and Fannie Mae loans.
2) MBS are valued using weighted average maturity (WAM) and weighted average coupon (WAC). These terms are essential and also listed for you when you purchase your MBS.
3) Some risks associated with MBS are prepayment risk, extension risk, default risk, and lower return than stock risk.
4) Inflation (surprise, surprise) can have an effect on MBS, along with regulatory risk and economic factors.
5) It is also possible to buy into MBS through electronic traded funds (ETFs). This can help you avoid the $1,000 or $25,000 minimum requirements.
This book came along at the right time. I am in the pre-stages of preparing a series called Investing for Interest, and MBS is a perfect addition. I plan on looking further into MBS after reading this excellent short book. Find it on Kindle Unlimited!
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