purchasing existing loans; thus, a market has compared to the mortgage payment. They face the
opened up providing liquidity to those holders of alternative of either losing the home they want to
mortgages who want to sell their loans. Giving up buy or use a private lending company to furnish the
yield for liquidity has been attractive to some funds needed to purchase the new home. In these
investors. The yield may be upwards of 1% lower cases, the lending company provides the loan to
for this ability to sell, but many have decided it is purchase the target home while the borrower
worth it. An Internet search of purchasers of attempts to sell the old home. When the old home
mortgage investments provides many companies sells, the proceeds are then used to pay down [or
willing to buy them. off] the target property thereby putting the borrower
in a position to refinance with a conventional lender.
With the Great Recession now more than five years
in the rear view mirror, many financial institutions
One of the major problems holders of longterm
have loosened debt instruments
some of their (be they
lending government or
restrictions. This corporate bonds)
has also caused encounter is not
interest rates to so much the risk
remain
competitive for
borrowers.
GREAT RECESSION
of failure, but the
opportunity cost
during rising
However, interest rates.
because of strict As interest rates
regulations with rise (as we are
Dodd Frank and the ATR [Ability To Repay] slowly starting to see now), the investor is caught
requirements imposed upon both conventional and holding investments that are losing principal, albeit
private lenders, many borrowers are facing temporarily. Sure, these investors can hold on to
difficulties obtaining the financing necessary to lowerreturn investments until maturity, but the price
purchase owner occupied real estate used for their they pay in the lack of opportunity to participate in
primary residence. Otherwise, relatively strong higher yielding instruments usually outweighs the
borrowers sometimes have a hard time qualifying wait. Of course, in times of declining interest rates,
under government imposed strict guidelines. With one would be better served to be in the longest
the increase of real estate outpacing borrower’s term bond possible and to sell just as interest rates
income, many would be home buyers are facing the begin to rise. The question then becomes one of
hard fact that they no longer qualify under the using a crystal ball in which way interest rates are
bank’s ratios regarding how much of one’s income headed.
RISK VS REWARD FOR MORTGAGE INVESTMENTS
Should You Add Mortgage Investments to Your Portfolio?