Stock market mortgage derivatives: The basic nuances involved

[Gabriel Knight]

Stock market mortgage derivatives are commonly referred to as mortgage backed securities. These are basically any type of investment or perhaps security that generally pays its investors with the profits generated. These profits mostly come from a particular grouping of mortgages. You might be asking a lot of mortgage questions and answers, but the answer to your question about the importance of mortgage derivatives lies elsewhere. Basically mortgage derivatives are seen as an investment that’s more secure as compared to stocks on the stock market. This is essentially due to the continuous cash flow that comes about from the monthly mortgage payments. These monthly mortgage payments are generally paid for each of the mortgages and it comes within the purview of the whole security.

The overseeing bodies

The mortgage backed securities are generally overseen by the Government National Mortgage Association (Ginnie Mae). This particular body is responsible for governing the rules and regulations. These securities are traded under those rules and regulations and are traded on the stock market. These can also be sold by another body called the Federal Home Loan Mortgage Corporation, or better known as Freddie Mac. There’s also the Federal National Mortgage Association or Fannie Mae. However, the latter ones aren’t really given the same cent per cent guarantee by the US Treasury as is the case of Ginnie Mae.

The benefits meted out

You’ve got to understand the fact that stock market mortgage derivatives generally have higher yields as compared to the government bonds. Most importantly, they’re considered low risk because they’ve got the backing of federal agencies. This money isn’t just principal being paid back on the loan, but it involves the interest also. Most importantly, this is one form of investment that has good liquidity in it as well. This means it can be easily bought as well as sold. Now, it’s for you to decide whether you want the investments to be of longer or shorter duration. The payouts on the derivatives generally take place on the last 2 weeks of each month.

The types of derivatives

As for stock market mortgage derivatives, then they can be pass-throughs, such that everyone gets a share of the profits that are derived from the mortgages. These are also known as collateralized mortgage obligations and it includes a fixed order and payment percentage. This, of course, depends on the stockholder.

The risks involved

Initially the stock market mortgage derivatives were considered to be low risk investments since there was collateral as well as security on the investments in the form of houses the mortgages had been taken out for. Now, of course, it’s a different story as the derivatives are considered to be a higher risk. This is essentially because of the practice of subprime lending. Moreover, there’s the concern of homeowners who begin refinancing when the mortgage rates fall. This further diminishes the returns on the investment of a mortgage derivative.

The buyers of the derivatives

Mostly, banks and various other lending institutions are known to buy stock market mortgage derivatives. However, individual investors also gained access to them and that too through their 401(k) retirement portfolios. This is essentially because they’re seen as relatively safe investments.

Keep in mind the above factors when thinking about investing in stock market mortgage derivatives. After all it’s important to research as much as possible before getting into something.