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Investing in Mortgage-Backed Securities

2 Frugal Dudes January 28, 2020 44


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    Investing in Mortgage-Backed Securities
    2 Frugal Dudes

Episode 151: What happens when your mortgage is sold? What’s mortgage-backed security? How can you invest in mortgage-backed securities? What are the risks? We cover this and a bit about Apple Cards in our latest episode of Where Our Money Went.


This week, Sean learned that his mortgage had been sold. What does that mean?

For Sean, nothing really changes. Mortgages often get sold to be packaged as mortgaged-back securities that investors and buy into. This frees up liquid assets for the banks to sell more mortgages and increase their revenue.

What is a Mortgage-Backed Security?

Mortgaged-Back Securities (MBS) are similar to a bond. Investors buy into bundled mortgages that a bank has secured for a regular periodic payout.

How a Mortgage-Backed Security Works

When banks set up an MBS, they put themselves in the position of middle man between investors and homeowners. The bank sells a mortgage to a home buyer and secures an investor to take over the loss. Through some fancy accounting, this makes the mortgage loan a positive on the balance sheet.

Can You Invest in a Mortgage-Backed Security?

Sean is looking into how this could be an investment opportunity for him and discovered that there are opportunities for a layman investor to invest in other peoples’ mortgages. The general return is around 2% and they appear to be quite safe.

However, Sean is wary because of the housing market crash of 2008. And, as it turns out, he’s not the only one.

Mortgage-Backed Securities and the Housing Crash

While the standards have changed since the crash of 2008, it was this style of investing that led to the great recession. It was low standards that ended up causing the market crash that had ripple effects around the globe. While the standards have improved, a process only works until it doesn’t.

From an investment standpoint, the MBS is a safe choice as long as everyone does what they’re supposed to. For Sean, the risk wasn’t worthwhile.

Family Vacation and Apple Cards

Kevin took his family to the Great Wolf Lodge, which is an indoor water park. They took advantage of an off-season deal that got them three nights for under $400 as opposed to $300 per night.

Kevin’s family took advantage of a value-add called “Magic Quest” in which you buy a magic wand then go to the various portals to receive quests, then go on a scavenger hunt to find the different things around the resort. In other words, your kids spend hours playing a game and running around.

Kevin has also invested in an Apple Card for his international travel. An Apple Card is meant to be significantly more secure than traditional credit cards and with fewer usage and exchange rate fees.

When you use an Apple Card, it generates a random credit card number for the transaction. As a result, if someone scans your credit card number for fraudulent purposes, the scammer won’t be able to use your card.

We’ll talk more about Apple Cards in the coming weeks. Stay tuned!

Show Links & Related Episodes


Music: https://www.bensound.com/royalty-free-music

Disclaimer: Kevin and Sean are not professional financial advisors. Do not take any advice they give without first speaking with a professional and performing your own due diligence.

What happens when your mortgage is sold? What's mortgage-backed security? How can you invest in mortgage-backed securities? What are the risks? We cover this and a bit about Apple Cards in our latest episode of Where Our Money Went.

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