Mortgages did not fare well last year, but this year they seem to be on the right track, according to USA Today. Mutual funds and other institutional investors have little interest in owning individual mortgages. Instead, they buy securities backed by large pools of mortgages. Well-known ones are put together by Freddie Mac and Fannie Mae. Of the $13 trillion in the U.S. mortgage debt today, about $6.5 trillion is in the mortgage-baked securities. Mutual funds typically don’t hold the worst mortgage pools, says Eric Jacobson, analyst at Chicago-based Morningstar. Many of them stick to high-quality Fannie Mae and Freddie Mac mortgage pools. The best time to invest in mortgage funds is when rates are stable, said Michael Garrett, a co-portfolio manager of the Vanguard GNMA fund, and for this year “we don’t see a dramatic shift.” If rates suddenly fall, many homeowners will refinance, giving a fund manager huge chucks of principal to reinvest, at lower rates. If rates suddenly fall, few people will refinance and the fund manager will have less money to reinvest at higher rates. Some analysts expect the Federal Reserve to cut short-term rates this year. If so, mortgage–backed funds could look a bit better in comparison to money funds, especially if long-term rates remain stable. The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.
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