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Whether
you're a newbie or a veteran with years in the stock
market, investing choices can be confusing.
Michael Tate
, a
Sacramento, Calif.
, investment adviser, offers advice.
QUESTION:
I have had GNMA mortgage bonds for over 10 years because
I've always liked their safety and return. Is there a
scenario where you could lose a lot of money with GNMA
bonds, or are they relatively safe?
ANSWER:
This question has been coming up more often lately as
investors look for higher returns than Treasuries or
CDs, but do not want to take a large degree of risk. But
first, for those unfamiliar with
Ginnie Mae
(GNMA) types of investments, we should define them.
The Government National Mortgage Association
(GNMA or
Ginnie Mae
) is a wholly owned U.S. government corporation
established in 1968.
Ginnie Mae
guarantees mortgage-backed securities (groups of
mortgages that are resold to investors) issued by other
corporations. It does not loan funds for the underlying
mortgages but ensures that investors receive as income
the principal and interest payments on mortgages.
Ginnie Maes
are predominantly backed by single-family, 30- or
15-year fixed-rate mortgages and 1-year adjustable-rate
mortgages. The mortgages in a pool have the same
interest rate, maturity term and dwelling type. The U.S.
government is pledged to paying out all amounts
guaranteed by
Ginnie Mae
.
There are
many positive factors associated with
Ginnie Maes
; however, I would focus on the risks associated with
investing in mortgage-related securities. Each must be
weighed against your risk tolerance.
To answer
your question about a rise in interest rates: You could
lose money if interest rates rise. All mortgages in a
particular pool have the same interest rate. When
investing in a fixed-income debt security, the price
will fluctuate inversely with interest rates. If you
sell the security in the secondary market prior to
maturity or redemption, you could sustain a capital loss
from the rise in interest rates.
Other
risks include:
—Inflation
and the loss of purchasing power.
—Uncertainty
of prepayments: Homeowners can repay their mortgage
prematurely, which is often true when interest rates
fall and homeowners refinance at lower rates. This can
lead to differences in the estimated yields.
—Return
of capital: The investor who purchases a
mortgage-related security should be aware that the
payment represents both earned interest income and
return of invested funds. If you spend all of the
payment, you are depleting your principal.
—Changes
in government regulations: There is no guarantee that
the U.S. Treasury's support of these securities will
continue or take the same form in future years.
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