Mortgage-backed Securities

Although interest rates dropped for most of this year, consumer loan rates remained stubbornly (from the borrower perspective) or satisfyingly (from the banker's perspective) high. So did mortgage rates. At last look, the average rate for a conventional residential mortgage was about 13%. That was a good five points over what you could earn in a typical money-market fund or money market-style bank account.

The trick to profiting from high rates, of course, is to get in on the lending side rather than the borrowing side. Knowing that, savvy investment managers have long invested in mortgages through what is known as the secondary market. Banks make the loans, then resell them, often through intermediaries like the Federal National Mortgage Association (Fannie Mae). Investors buy packages of these mortgages in the form of mortgage-backed securities. This year about half of the estimated $200 billion in new mortgage money will be channeled through this market.

A new mutual fund, set up to invest in these securities, should make it easier for individuals to get a piece of the action and thereby to get in on the good side of stubbornly high mortgage rates. Called the Home Investors Fund, it was established last spring by the National Association of Realtors and the National Association of Home Builders. The two associations, not surprisingly, had an ulterior motive They wanted to channel more investment capital into the housing industry.

Home Investors is a no-load mutual fund; its shares can be bought and sold on the open market. The value of the shares will typically fluctuate -- up when interest rates are low, down when they are rising. But they should continue to pay relatively high rates of return (for example, 10.6% -- an estimated yield based on a model portfolio -- at the beginning of the summer).

The minimum investment is $2,000. A prospectus is available from the Home Investors Fund, P.O. Box 876, Morris Dr., Valley Forge, PA 19482.

Follow Inc. magazine at @incmagazine