Since holding stock is risky Mortgage backed securities became popular.  They are good for fixed income They are part of the bond market.  They came about by securitization – loans are pooled and turned into securities.  They then are marketable and get sold to investors.  They are called pass-through securities because the holder of a the certificate receives interest and principle on the mortgages on a monthly basis.

Collateral mortgage obligations (CMO)
Government National Mortgage Association (GNMA) – mortgage pools that you can buy a bond into ($25,000 min.)
FNMA, FHLBank, private investment organizations also.
GNMA does this securitization.
GNMA = favorite of retired investor because of the high yields. GNMA = agency of US government

Mortgage backed securities  – provides more capital to make mortgages and liquidity increases.  1/3 of all mortgages are securitized.

GNMA – government stands behind them

Always prepayment rate risk – because they pay you principle + interest.  When someone moves, or refinances you get paid off early.  Most people move before their mortgage is paid off – or refinance.

GNMA – as interest rates decrease, prices increase.  (Prices stop rising because borrowers will refinance).

Mortgaged backed securities are more susceptible to reinvestment risk than others because they get principle + coupon monthly.

Mortgage backed securities average life = sum of (time X received principle) / total principle