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When you invest in mortgage-backed (MBS) and asset-backed (ABS) securities you are purchasing an interest in pools of loans or other financial assets. In the case of mortgage-backed securities, these are usually first mortgages on residential properties. With asset-backed securities, the assets might be credit card receivables, auto loans and leases or home equity loans. As the underlying loans are paid off by the borrowers, the investors in MBS/ABS receive payments of interest and principal over time. These securities help make credit available to more people by giving lenders access to large pools of capital as well as help them manage their risk.

The largest sector of the MBS market is the “agency” securities market. Agency securities are issued by a government agency such as Ginnie Mae or a government-sponsored enterprise such as Fannie Mae or Freddie Mac. These agencies typically guarantee the interest and principal payments on their securities and are considered to offer strong credit quality due to their explicit government backing (in the case of Ginnie Mae) or access to support from the U.S. Treasury (in the case of Fannie Mae and Freddie Mac). The mortgage-backed securities market also includes “private-label” mortgage securities issued by subsidiaries of banks, financial institutions and home builders, but this market is smaller than the Agency MBS market. 

Asset-backed securities (ABS) often carry some form of credit enhancement, such as bond insurance, to make them attractive to investors.

This section explains some of the ins and outs of investing in mortgage-backed and asset-backed securities. Use the information here to learn more about:

  • Different types of mortgage-backed and asset-backed securities
  • Collateralized Mortgage Obligations (CMOs) and Real Estate Mortgage Investment Conduits (REMICs)