Your broker calls to offer you the investment opportunity

jagguarpaw January 27, 2017 0 Comments

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.