Another unique characteristic of mortgage-backed securities is the way they are repaid. Every month, borrowers pay back some principal as well as some interest, and that is the way bond investors receive their money. Careful investors know they will need to reinvest the principal portion of the payments they receive if they want their investments to last. They also need to keep careful records of investments and withdrawals so that they don't overpay their income taxes by paying gains taxes on principal they receive.
Most investors buy mortgage-backed securities via mutual funds or exchange traded funds that specialize in them. The upside of that is diversification and low cost management (if you're choosing a low-cost fund.) But most funds don't have maturity dates, so fund investors have to do without having that one date certain when they know they can get their principal back in full. Fund investors should also make sure that their funds limit themselves to high grade quasi-government debt, and don't fill their portfolios with higher-risk corporate bonds.
Change Is Coming, But It Is Unclear
Washington has spent years debating what to do with Fannie Mae and Freddie Mac in the future, and quick change is unlikely.
Even if Fannie and Freddie are privatized, older bonds would be safe, suggests David Reiss, a law professor of real estate finance at Brooklyn Law School.
"The government would not change the rules of the game for securities purchased with the guarantee. Pre-privatization (securities) would retain the guarantees, and future securities would have a different type of guarantee," he said.
For now, he says, investors are relatively safe: "Effectively the only risk is the interest rate risk."