Mortgage-Backed Bonds (MBBs) are a specific type of bond that is backed by a pool of mortgages. These mortgages are typically residential mortgages that have been created by banks or other lending institutions. The principal and interest payments from these individual mortgages are pooled together to provide the regular interest payments that the MBB investors receive.
Examples
- Fannie Mae Bonds: Government-sponsored enterprises like Fannie Mae issue mortgage-backed bonds, which are secured by a pool of mortgages that conform to Fannie Mae’s standards.
- Freddie Mac Bonds: Similar to Fannie Mae, Freddie Mac also issues MBBs secured by mortgages that meet their guidelines.
- Jumbo Mortgage Bonds: These are MBBs backed by non-conforming loans which are typically larger than the standard limit set by Freddie Mac and Fannie Mae.
Frequently Asked Questions
What is the difference between Mortgage-Backed Bonds (MBBs) and Mortgage-Backed Securities (MBS)?
- MBBs are akin to traditional bonds where the entire pool of mortgages secures the bonds, providing regular interest payments to bondholders.
- MBSs can include various types of securities, such as pass-through securities and collateralized mortgage obligations (CMOs). Payments and the order in which they are received can vary widely under MBSs.
Are Mortgage-Backed Bonds safe investments?
- MBBs are generally considered safer than other mortgage-related instruments due in part to the backing by a pool of mortgages. However, their safety also depends on the creditworthiness of the underlying mortgages.
How do Mortgage-Backed Bonds generate returns?
- Returns primarily come from the mortgage payments made by homeowners, including both interest and principal payments that are passed through to the bondholders.
Related Terms
Collateralized Mortgage Obligation (CMO)
A type of MBS that pools together mortgages and creates tranches with varying levels of risk, term, and interest rate.
Mortgage-Backed Security (MBS)
A broader category that includes all types of securities backed by mortgage loans, including pass-through securities and CMOs.
Pass-Through Security
A type of MBS where mortgage principal and interest payments are collected by a servicer and passed proportionately to holders of the security.
Online Resources
- Investopedia - Mortgage-Backed Security (MBS)
- SEC - Mortgage-Backed Securities
- FINRA - Understanding Mortgage-Backed Securities
References
- Fabozzi, Frank J. “The Handbook of Mortgage-Backed Securities.” McGraw-Hill Education, 2016.
- Ginnie Mae. “Ginnie Mae Mortgage-Backed Securities Guide,” 2021.
Suggested Books for Further Studies
- “The Handbook of Mortgage-Backed Securities” by Frank J. Fabozzi
- “Fixed Income Analysis” by Frank J. Fabozzi
- “The Mortgage Professional’s Handbook” by Jess Lederman and Thomas J Cappelletti
Real Estate Basics: Mortgage-Backed Bonds Fundamentals Quiz
### What primarily backs Mortgage-Backed Bonds?
- [ ] Corporate assets
- [x] Pool of mortgage loans
- [ ] Government subsidies
- [ ] Individual investor funds
> **Explanation:** Mortgage-Backed Bonds are primarily backed by a pool of mortgage loans. The mortgage payments from these loans are pooled together to provide the regular interest payments to the bondholders.
### Which institutions are commonly involved in issuing Mortgage-Backed Bonds?
- [x] Fannie Mae and Freddie Mac
- [ ] Local municipal authorities
- [ ] Credit card companies
- [ ] Small retailers
> **Explanation:** Institutions like Fannie Mae and Freddie Mac are commonly involved in issuing Mortgage-Backed Bonds. These are government-sponsored enterprises that securitize conforming mortgages.
### What type of mortgages usually back Mortgage-Backed Bonds?
- [ ] Auto loans
- [ ] Business loans
- [x] Residential mortgages
- [ ] Equipment leases
> **Explanation:** Residential mortgages typically back Mortgage-Backed Bonds. These mortgages can include those conforming to the standards of entities like Fannie Mae and Freddie Mac.
### What is a primary risk associated with Mortgage-Backed Bonds?
- [ ] Increase in property taxes
- [x] Default on underlying mortgages
- [ ] Stock market volatility
- [ ] Changes in government policy
> **Explanation:** A primary risk associated with Mortgage-Backed Bonds is the risk of default on the underlying mortgages. The payment received by bondholders depends on these mortgage payments.
### How do Mortgage-Backed Bonds differ from Mortgage-Backed Securities?
- [ ] They involve more government oversight.
- [ ] They are privately issued.
- [x] They function like traditional bonds with a pool of mortgages as collateral.
- [ ] They are not income-generating.
> **Explanation:** Mortgage-Backed Bonds differ from other Mortgage-Backed Securities as they function more like traditional bonds, with a pool of mortgages as collateral providing regular interest payments to investors.
### What entity often creates the pool of mortgages for Mortgage-Backed Bonds?
- [ ] Individual homeowners
- [ ] Real estate brokers
- [ ] Mortgage lenders and banks
- [ ] Construction companies
> **Explanation:** Mortgage lenders and banks typically create the pool of mortgages for Mortgage-Backed Bonds. These mortgages are then securitized and sold as MBBs.
### Why might an investor consider Mortgage-Backed Bonds a safer investment compared to other types of mortgage-related securities?
- [ ] Government guarantees high returns.
- [x] They are backed by a diversified pool of mortgages.
- [ ] They have unlimited growth potential.
- [ ] They avoid the risks associated with regular income bonds.
> **Explanation:** Investors might consider Mortgage-Backed Bonds safer because they are backed by a diversified pool of mortgages, which helps to spread the risk compared to direct mortgage investment.
### What happens if mortgages in the pool backing an MBB default?
- [ ] The government will cover all losses.
- [ ] All investors instantly lose their money.
- [x] The value and returns of the MBB could be negatively impacted.
- [ ] The MBBs pay out bonuses to the remaining bondholders.
> **Explanation:** If mortgages within the pool default, the value and returns of the Mortgage-Backed Bonds could be adversely affected since the bond's performance depends on the expected mortgage payments.
### Which of the following offers structured investment involving tranches with different levels of risk?
- [ ] Federal bonds
- [x] Collateralized Mortgage Obligation (CMO)
- [ ] Corporate bonds
- [ ] Government savings bonds
> **Explanation:** Collateralized Mortgage Obligations (CMO) offer structured investments with tranches, each having different levels of risk, interest rates, and terms.
### What regular payment is an investor likely to receive from a Mortgage-Backed Bond?
- [x] Interest payments from the pooled mortgages
- [ ] Dividends from corporate profits
- [ ] Rent from residential properties
- [ ] Capital gains from property sales
> **Explanation:** An investor in a Mortgage-Backed Bond is likely to receive regular interest payments derived from the pooled residential mortgages that secure the bond.
