Federally
Backed Mortgage Notes
Conservative investors desiring income
can do better than many other alternatives by investing in federally
guaranteed and federally backed mortgage notes. The notes issued
by Ginnie Mae, Freddie Mac and Fannie Mae often provide yields
1% to 1.5% better than Treasury notes. And for investors willing
to make the required tradeoff, the extra income can be welcome.
Mortgage notes have an implied AAA rating.
Therefore, the credit markets do not consider them to have more
credit risk than treasury securities. But while treasury securities
have a fixed maturity date, mortgage notes do not. And you
get a higher yield for accepting that variability.
When you invest in mortgage notes, you
are lending your money to a group of people to buy homes (with
the federal agency or federally sponsored corporation guaranteeing
your money). If the borrowers move and pay off their mortgage
or refinance, you get paid back. This could happen at any time.
You could get payments or principal at any time. For many seniors,
this is not a big negative because the return of their principal
is of utmost importance, which is assured if you hold the notes
to maturity (various maturity options are readily available).
If extra income is desired without sacrifice
of credit quality, check off for information on mortgage notes.
(Note that with mortgage securities, the yield and average life
consider prepayment assumptions that may or may not be met.
Changes in payments may significantly affect yield and average
life. Both treasury securities and mortgage notes have a fixed
percentage yield and treasury securities have a fixed maturity).
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