Investors increasingly like to buy into mortgages, and Wall Street is trying to oblige. You're being offered a growing variety of possibilities -- some of which may suit you more than others.
The most popular investments are something called "pass-through" securities. Here, you buy a direct participation in a pool of home mortgages. The homeowners who took out those mortgages make monthly repayments of interest and principal every month, and you, the investor, get your pro-rata share.
These securities now come in three types:
The newest on the block is the "mini" Fannie Mae pass-through -- a security made up principally of conventional home mortgages, with payments guaranteed by the Federal National Mortgage Association. Previously, Fannie Maes were available only in $25,000 denominations. Now, FNMA is experimenting with securities costing as little as $1,000.
At present, mini-Fannie Maes are available only at the Boston Five Cents Savings Bank, and only for IRA and Keogh plan investors. At its initial offering last month, "the response was overwhelming," David E. McKenzie, the bank's pension trust officer, told my associate, Virginia Wilson. Estimated recent yield: 11.87 percent.
The bank says it will rebuy its mini-Fannie Maes if you want to sell before they mature; otherwise, there is no market for them. If you do decide to sell before the term is up, your investment may be valued at less than you originally paid.
Right now, you can invest with the Boston Five only if you live in one of five states (Connecticut, Maine, Massachusetts, New Hampshire and North Carolina). Mini-Fannie Maes may be coming soon to other lenders.
Freddie Macs are a similar investment, but the minimum remains $25,000. These mortgage pools are backed by the Federal Home Loan Mortgage Corp.
Neither corporation is directly insured by the federal government. But because of their importance to the housing market, it is generally believed that the government would come to their rescue in a pinch.
Ginnie Maes -- with mortgages guaranteed by the Government National Mortgage Association -- are directly backed by the U.S. government. A single Ginnie Mae security costs $25,000 new, although older securities on the market can be bought for much less.
The trouble with any pass-through security is that you cannot predict in advance exactly what the yield will be. The mortgage holders may repay faster than you expected or they may repay more slowly. The probable yield on each security is based on the average repayment rate -- so a change in repayments can raise or, more likely, lower your ultimate yield.
This risk is especially large with Ginnie Maes, because each pool may contain only 40 or 50 mortgages. Freddie Macs and Fannie Maes often contain a few thousand mortgages, so they're more apt to follow the average repayment rate.
There are two ways to be reasonably sure that you'll get the yield you bargained for:
* Buy a security at par (face value). If you pay more than face value (which you might, for a pool paying an especially high interest rate), there is a good chance that your ultimate yield will be smaller than advertised.
* Buy an older security, whose rate of repayment is well established.
You can also buy mortgage-backed securities through unit trusts and mutual funds, for minimum investments of $250 to $3,000. With a unit trust you buy a share in a fixed number of securities -- usually Ginnie Maes. The sales charge is about 3.5 percent.
Buyers face the same risks as they do with single Ginnie Maes. If you choose a unit trust with an especially high interest rate, it is apt to mature faster than you expected and pay a lower yield than was originally advertised.
Mutual funds let you reinvest your principal and interest in more mortgage-backed securities, something you cannot do with unit trusts. But some mutual funds engage in speculative activities, like buying options and futures. If these strategies backfire -- as they often do -- they'll cost you money.
Generally speaking, it's an error to buy a unit trust or mutual fund that is yielding more than a single, newly issued Ginnie Mae or similar security. To pay more, it has to take risks that you may regret.
Mutual-fund buyers should stick with no-load funds, those which charge no commission. No-load Ginnie Mae funds include the Vanguard Fixed Income-GNMA Portfolio (Valley Forge, Pa.) and the Lexington GNMA Income Fund (Englewood Cliffs, N.J.).