Safety

Ginnie Maes are backed by the full faith and credit of the U.S. government.

Freddie Mac and Fannie Mae are not direct obligations of the U.S. government, but they both have a line of credit to the U.S. Treasury. Credit markets consider their safety to be nearly equivalent to agencies that have the full faith and credit backing of the U.S. government.

The mortgage-backed market is one of the largest financial markets in the world. At the end of 2014, the number of U.S. mortgage-related securities outstanding was $8.73 billion.

These securities issued by GNMA, FHLMC or FNMA carry an implied AAA credit rating.

Yield

Most investors of mortgage-backed securities receive interest and principal payments on a monthly basis throughout the life of that security.

The yield on these can be affected by homeowners making mortgage pre-payments. However, mortgage-backed-type securities generally offer higher yields than other securities with comparable credit quality. What the investor gives up for that higher yield is certainty about the maturity of the investment.

Diversity

Mortgage-backed securities offer a range of maturities that include 30, 15, seven or five-year terms.

The secondary market is sizable and active due to the network of dealers executing trade transactions with other dealers on a national basis.

Limitations

Generally, inherent prepayment risk exists for investors of mortgage-backed securities. The unpredictable nature of mortgage prepayments usually increases as long-term interest rates decrease. If mortgage rates fall, this may cause a rise in the price of mortgage bonds. The homeowner (mortgagor) has the right to call the mortgage away from the investor at par when its value may be more or less than par.

Reinvestment risk can be realized if principals are received earlier than expected.