Over the past two quarters, the housing market has shown significant signs of improvement.  This improvement has decreased the total amount of residential properties that are considered underwater (they owe more on their mortgage than the property is worth).  Overall, the levels of negative homeowner’s equity has been on the decline since the beginning of the year.  Essentially, people’s homes are now worth more than they owe in greater percentages than in the beginning of 2014.

The main driver behind this improvement is the increase in the median home prices.  According to CoreLogic, recognized as the premier supplier of real estate, and mortgage data, between July 2013, and July 2014, home prices have risen 7.4% in the USA. 

This price increase has helped to considerably decrease the amount of homes currently underwater.  CoreLogic states that in Q1 2014 352,000 residential properties rose from being underwater, and in Q2 2014 946,000 residential properties rose above water.  This has brought down the U.S. residential properties underwater from 6.608 million in the beginning of the year to 5.31 million currently.  Moreover, the Q2 decline is the second largest since the data started to be collected in 2009. 

Therefore, with the housing market gaining traction, and 1.2 million residential properties now above water, it would be wise to look into investments that would benefit from this positive news.

Mortgage Bond Mutual Funds

Mortgage-Bond mutual funds tend to primarily invest in bonds and other debt instruments.  Typically, the fund will focus on a specific area of government, corporate, municipal and convertible bonds, along with mortgage-backed securities. 

We were able to find 5 Mortgage Bond Mutual Funds that had no front loads (to better understand Load Fees, please click here), and a minimal Expense Ratio (to better understand Expense Ratios and how they impact mutual funds, please click here). 

We filter out the Loads, and Expense Ratios because the fees tend to take a significant portion of any gains made by the investor.  Then we picked the 5 best Zack Ranked #1 mutual funds that fit all of our criteria. 

To better understand the methodology of the Zacks Mutual Fund Ranking system, please click here. 

Funds To Consider

Blackrock Allocation Target Shares Series C (BRACX - MF report) a Zacks Rank #1 (Strong Buy) seeks to maximize total return, consistent with income generation and prudent investment management.  Further, this fund was incepted in 2004.  The fund is not front loaded, or back loaded, and has a minimal Expense Ratio of 0.15 (extremely low), which will keep more of the funds profits in your hands not the brokers. 

Past Performance: 1 year 10.22%, 3 year 6.91%, 5 year 7.63%. 

Universal Institutional Fund Core (UFIPX - MF report) a Zacks Rank #1 (Strong Buy) looks for above-average total return over a market cycle of three to five years.  The fund invests in a diversified mix of dollar denominated investment grade fixed income securities, particularly US government, corporate, and mortgage securities. 

This fund has a small management fee (0.38%), but its overall expense ratio is minimal, 0.69%.  This is a fair tradeoff for the stock picking by the fund manager.  This fund is currently invested in US Treasury Bonds, and Notes, along with many Mortgage holdings as well.

Past Performance: 1 year 8.87%, 3 year 5.52%, 5 year 6.15%. 

Loomis Sayles Securitized Asset (LSSAX - MF report) a Zacks Rank #1 (Strong Buy) invests at least 80% of its net assets in a diversified portfolio of securitized assets, such as mortgage-backed and other asset-backed securities.  Further, the fund invests in mortgage-backed and asset-backed securities similar to those in the Barclays U.S. Securitized Bond Index. 

The fund has a small management fee (0.21%), and its overall expense ratio is 0.28, a very low ratio when compared to the fund universe.  Currently, the fund is heavy FNMA, GNMA, and several other mortgage-backed securities. 

Past Performance: 1 year 6.53%, 3 year 5.03%, 5 year 7.55%.

Vanguard GNMA Fund (VFIIX - MF report) a Zacks Rank #1 (Strong Buy) seeks a high and sustainable level of interest income.  The fund invests in a broad range of mortgage-backed securities issues by the Government National Mortgage Association.  The fund declares dividends on a daily basis and distributes them on the first business day of each month.  Capital gains are distributed annually in December. 

Like our other Funds, VFIIX has no front loaded or redemption fees, yet it does have a very reasonable 0.18% management fee.  The total expense ratio is minimal at 0.21%. 

Past Performance: 1 year 6.09%, 3 year 1.81%, 5 year 3.92%.

Fidelity Mortgage Securities Fund (FMSFX - MF report) a Zacks Rank #1 (Strong Buy) seeks a high level of current income, consistent with prudent investment risk.  The fund normally invests at least 80% of its total assets in investment-grade mortgage-related securities and repurchase agreements for those securities.  Finally, the fund offers a monthly dividend and capital gains, if any, are distributed in September and December. 

This fund has no front loaded or redemption fees, but it does have a small 0.31% management fee.  It brings up the total expense ratio to 0.45%, still very low for a mutual fund. 

Past Performance: 1 year 5.73%. 3 year 2.25%, 5 year 4.29%.

Bottom Line

As more residential properties come back above water, more and more loans will become increasingly attractive.  This then creates more stability in the sector, and a steadier stream of good loans into the funds.  So, as the housing market continues to rebound it would be wise to look into Mortgage-backed Mutual Funds for solid growing returns.