Group investment mortgages, also known as mortgage backed securities, are a way for investors to own many mortgages at once. Just like a mutual fund, the return on your investment depends on the value of the mortgages in the fund, specifically how much they receive in mortgage payments. The federal government, through government-backed organizations such as Ginnie Mae, Fannie Mae, and Freddie Mac, is the most common provider of group investment mortgages, but they are also issued by private investment organizations.
Group Investment Mortgages as Investments
Group investment mortgages can fluctuate in their return on your investment. Some reasons include:
- Adjustable rate mortgages automatically vary in how much they return to the investor.
- Refinanced mortgages change the profitability of a mortgage.
- Defaults typically reduce a lender's total profit; this is a particularly high risk with bad credit loans.
- Prepayments significantly reduce the total interest a lender receives and consequently lowers the value of the mortgage as an investment.
Group investment mortgages are likely to give the best returns when they include high proportions of adjustable rate mortgages and interest rates are rising, though if the rates are so high that many of the borrowers refinance, prepay, or default, this can backfire.
During times of economic insecurity or a down market for housing, borrowers may be more drawn to fixed rate mortgages. These make the group investment mortgages more predictable - at least during the short term - though changes in interest rates might encourage borrowers to refinance or prepay.
Government Sponsored Mortgage Backed Securities
Ginnie Mae is backed by the full faith and credit of the US government, which means that it is almost the equivalent of an FDIC insured bank account. Other organizations do not carry this guarantee, making them riskier kinds of group investment mortgages.
The Government National Mortgage Association (Ginnie Mae) is part of the Department of Housing and Urban Development (HUD). It pools Federal Housing Authority (FHA) and Veterans Administration (VA) mortgages and sells these as securities.
Fannie Mae is the Federal National Mortgage Association, a privately owned and publicly traded stock on the NYSE (under the symbol FNM) and is part of the Standard & Poor's 500. Its primary income is the fee that it charges lenders to guarantee the mortgage loans that they make to certain types of borrowers. Essentially, it gambles that the revenue from these fees will offset any losses it incurs if a loan is defaulted and it must make up the lender's losses.
There is controversy over perceived advantages Fannie Mae has over regular corporations (it has less stringent requirements over how it issues mortgage backed securities) and whether this represents an unfair advantage in the market. There have also been scandals about its internal accounting and management.
The Federal Home Loan Mortgage Corporation (Freddie Mac) is founded on the same principles and operates the same ways as Fannie Mae, as its purpose is largely to serve as competition with Fannie Mae. It trades on the NYSE as FRE.Like Fannie Mae, it's been involved in scandals over accounting practices that allegedly concealed problems in order to preserve bonuses for top management.
Private Label Mortgage Securities
Private label mortgage securities are issued by companies which are not back by the government and include banks, mortgage corporations, equity groups, and other financial firms. These securities are typically designed for the more sophisticated investors and investment groups.