Co-produced with Beyond Saving
If you are an income investor, mortgage REITs (mREITs) are consistently among the highest yielding options. Some people pay interest, other people like to collect it. At High Dividend Opportunities" we think it's much better to be one of net interest collectors. However, one of the major risks of owning debt is if the borrower is unable to pay. Debt is only worth what the borrower can eventually pay or the value of any collateral.
Perhaps one of the most intriguing mortgage assets to own today is "agency mortgage-backed securities" (agency MBS). This unique asset removes the risk of the underlying borrowers defaulting on the mortgages.
Banks that originate mortgages are not interested in waiting for decades to get their capital back – they want to originate more mortgages to new customers. So when an individual gets a mortgage, as long as the loan qualifies, the loan is quickly sold to "Government Sponsored Enterprises" (or GSEs) Fannie Mae or Freddie Mac. Those agencies then repackage the mortgages into MBS and sell them to investors who are willing to sit back and collect the interest payments – hence the term "agency MBS." In order to ensure investor demand, the GSEs include a principal guarantee. If the borrower defaults, the GSE will buy back the mortgage for the amount of principal still owed.
This creates a unique asset where investors can receive mortgage interest with very minimal credit risk. Whether the borrower defaults or not, the investor is getting the principal. So regardless of the credit ratings of the underlying borrowers, agency MBS always is AAA rated. Agency MBS is known as one of the most conservative investments outside of US Treasuries.
Agency mREITs like Annaly Capital (NYSE:NLY) provide investors an opportunity to take advantage of this
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