Friday, May 6, 2016

Mortgage-Backed Securities

Mortgage-backed securities are pools of residential mortgages that have been securitized – that is, grouped together and resold to institutional and private investors. These securities trade in the
secondary market. Introduced in 1986, MBS issues have become a routine part of the mortgage industry.

Canada Mortgage and Housing Corporation (CMHC) is the main creator of mortgage-backed securities in Canada, although private companies may issue them, too. CMHC guarantees the payment of interest and repayment of principal on its issues.

Similar to the underlying mortgages, these pools can be closed (which means that no prepayments, or the opportunity to pay off the mortgage before maturity, are allowed) or open (prepayments are allowed, which increases the risk to the investor).

Most common are the five-year pools that are denominated in multiples of $5,000. MBSs earn returns that are comparable to GICs and are typically higher than Treasury bills or other
Government of Canada bonds with similar terms.

With consistently low mortgage rates over the last five years, variable-rate mortgages and adjustable-rate mortgages have gained considerable popularity with home buyers. This has led to
an increase in the demand for products offering variable-rate and adjustable-rate mortgages.

Mortgage-backed securities are attractive to income-oriented investors since investors receive a cheque every month. Although they are low risk, since most are guaranteed by CMHC, investors
should be aware that liquidity in the secondary market for certain issues can be poor.

No comments:

Post a Comment