How are MBS different from corporate or municipal bonds that have a coupon attached? For example, if I invest 25,000 per year, how do I get the return? Is there a fixed coupon?

Also, I heard of pool notifications. What are they?


How are MBS different from corporate or municipal bonds that have a coupon attached?

There are many flavors of Mortgage Backed Securities (MBSs), but there are some that simply pay a fixed coupon amount just like a fixed-rate corporate or municipal bond.

One main difference is what is behind the bond. An MBS passes through the payments made through thousands of mortgages that back the MBS. So the risk of loss in an MBS comes from the risk that borrowers default on their mortgages, and the MBS won't be able to make its coupon payments.

With a corporate or municipal bond, the coupons come from the cash flows of the corporation or municipality, and the loss of risk comes from the risk that the obligor won't have the cash to make the coupon payments.

Another difference is the payment structure. Bonds typically pay only interest until the bond matures, at which time the principal is paid in a lump sum. MBSs typically pass through whatever mortgage payments it receives until all principal is repaid, which is usually less than the time frame indicated by the underlying mortgages, since it's not uncommon for people to sell their homes and pay off the old mortgage with the sales proceeds, or to refinance their mortgage with a new one. So there is risk that you'll get paid back sooner than you anticipated (why this is bad for some investors is a longer discussion)

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