Question: Your broker calls to offer you the investment oppo…
Your broker calls to offer you the investment opportunity of a lifetime, the chance to invest in mortgage-backed securities. The broker explains that these securities are entitled to the principal and interest payments received from a pool of residential mortgages. List some of the questions you would ask your broker to assess the risk of this investment opportunity.
A. Quality of real estate (is it in a good condition, or would there need to be repairs prior to sale?)
B. Real estate location (after all, the three most important determinants of real estate price are “location, location, location”).
C. Precedence in bankruptcy (would other lenders have a senior claim to properties in bankruptcy?).
D. Percentage of properties in the region that are “under water” (homeowners owe more than they borrowed) or in foreclosure.
E. What percentage of borrowers are behind on their mortgage payments?
F. Type of real estate (commercial properties offer less liquidity if the market turns sour, because empty homes can be rented for revenue).
G. Creditworthiness of borrowers (how likely is it that borrowers will lose their job and be unable to make payments on a timely basis?).
H. Will borrowers soon be experiencing an interest rate increase because they took out a mortgage with a low initial rate that was adjustable after a period of time?
I. All of the above.