What Are Mortgage Investments?

Mortgage investments represent a stake in a pool of mortgages.

Mortgage investments are called mortgage-backed securities (MBS) and represent separate stakes in "pools" of mortgages. Investors receive payouts on interest and principal collected by lending institutions.

Mortgage-Backed Securities

According to Fidelity Investments, an MBS is backed by a national network of lenders and in some cases a government mortgage institution. Two main types of MBS are "pass-throughs" and collateralized mortgage obligations (CMO). The main difference between the two is the payment process.

Pass-Throughs

In a pass-through investment, the lender holding the mortgage will take a fee from the interest and principal of the mortgage pool, and then pass the difference on to the investors. According to Investopedia, some of these investments are issued by Sallie Mae, Freddie Mac and Fannie Mae and backed by the U.S. government.

Collateralized Mortgage Obligations

In a CMO, separate pools of pass-through investments, called tranches, are packaged and redistributed to classes of investors based on the structure of the bond. Fidelity says these tranches give the investor more predictability. The bond is retired when the pool is paid off. Investors in each tranche receive interest until that point.

References

• Fidelity Investments
• Investopedia