What Is a Mortgage-Backed Revenue Bond?

A mortgage-backed revenue bond is a 澳洲幸运5官方开奖结果体彩网:debt security, usually issued by a municipality, that is used to fund low-rate 澳洲幸运5官方开奖结果体彩网:mortgages. The coupon payments of the bond come from 🍨the interest pay♍ments on the mortgages that the bonds are used to fund.

Understanding a Mortgage-Backed Revenue Bond

Mortgage-backed revenue bonds are issued to obtain funding for low-interest-rate mortgages. The mortgage payments collected from the funded loans provide the bond's coupon payments. In essence, the entity issuing the loan outsources mortgage funding to 澳洲幸运5官方开奖结果体彩网:bondholders, who get paid a coupon based on the mortgage interest rate. Municipalities commonly issue these types of bonds through 澳洲幸运5官方开奖结果体彩网:housing finance agencies (HFAs).

Mortgage-backed revenue bonds are similar to 澳洲幸运5官方开奖结果体彩网:mortgage-backed securities. However, mortgage-backed revenue bonds are issued by municipalities, while mortgage-backed securities are issued by private entities or a 澳洲幸运5官方开奖结果体彩网:government-sponsored enterprise (GSE).

Municipalities find mortgage-backed revenue bonds attractive because they provide social benefits within the community. By backing the issuance with low-interest-rate mortgages, municipalities can assist low-income first-time homebuyers who may not otherwise be able to afford 💫the monthly payments associated with a standard mortgage.

Revenue Bonds

澳洲幸运5官方开奖结果体彩网:Revenue bonds generally refer to a subset of 澳洲幸运5官方开奖结果体彩网:municipal bonds where the bo🐓rrowed fundಌs go toward a revenue-generating project or investment. The revenue generated from the investment, in turn, is used to pay back bondholders.

Because their repayments get tied to a specific income stream, revenue bonds carry greater risk than 澳洲幸运5官方开奖结果体彩网:general obligation bonds, which municipalities repay through an array of 🐎sources, inꦉcluding tax revenue. In theory, that additional risk should generally provide investors with a better yield from a revenue bond versus a general obligation bond.

In the case of mortgage-backed revenue bonds, also known as housing bonds, the coupon payments that investors receive are typically exempt from taxes. This tax-advantaged treatment allows the bonds to remain attractive, despiꦆte returning lower interest rates ꦜin line with the mortgages that back them.

Bond proceeds could also go toward financing other types of real estate 🧸development, such as affordable rental housing. In those cases, the developer makes interest payments funded by the rent collected on the property.

Structuring a Mortgage-Backed Revenue Bond

Mortgage-backed revenue bonds are often created through a collaboration between 澳洲幸运5官方开奖结果体彩网:Freddie Mac or 澳洲幸运5官方开奖结果体彩网:Ginnie Mae and HFAs. The original lenders of the mortgages pool them into securities that are backed byꦯ Freddie M♊ac or Ginnie Mae. The securities are then sold to the housing finance agencies. It's important to note that the individual mortgages are not sold, just the securities.

Thes💯e securities are then issued by state or local governments in conjunction with housing finance agencies.

Investing in a Mortgage-Backed Revenue Bond

As with any revenue bond, investors must take care to ensure they receive appropriate compensation for the risk they take. The potential for default on mortgage loans remains a risk in any bond backed by real est🀅ate, even when the loans go below market rate.

The quality of 澳洲幸运5官方开奖结果体彩网:underwriting matters when investing in a mortgage-backed revenue bond. Likewise, the duration of the bond may vary. Most cover a short term, further red🍷ucing the 💯default risk involved in any given issuance, and keeping interest rates relatively low.

The tax advantages provided by housing bonds can also offset the risks involved. From an investor’s standpoint, the value of tax-exempt interest derives from the actual amount of tax saved compared to a similar investment. Therefore, the value of tax-exempt interest rises alongside an investor’s 澳洲幸运5官方开奖结果体彩网:marginal tax rate.