CMOs

[JB]

I have just liquidated all of my equities after 6 frustrating years of roller coaster ride with no noticable capital growth and P/Es of about 2-3%.<br /><br />I want to protect my savings (what is left after the '99-'01 bloodbath) and get some income out of my investments (so I can buy gas ).<br /><br />My broker recommends high quality Collateralized Mortgage Obligations. Sort of bundled mortgages. He says they are currently paying 5-5.5%.<br /><br />Anyone have experience or expertise with those? I never heard of them before.

 

[Bob_VT]

Re: CMOs

I have heard of them and with the way the housing market is going coupled with the feds raising the interest rates they sound interesting. <br /><br />Bob

 

[Vlad D Impeller]

Re: CMOs

Collateralized Mortgage Obligations?? <br /><br />I've never heard of that one, <br /><br />Tell me more, tell me more, somebody please tell me more

 

[DJ]

Re: CMOs

JB,<br /><br />Yes I have heard of ".Collateralized Mortgage Obligations". They are basically a share in commercial mortgage properties.<br /><br />Whomever you go with, get a prospectus from the people offering them. Be aware that as mortgage rates go up, only the strongest companies can get the best mortgage rates. Thus, their return will be higher.

 

[KRS]

Re: CMOs

I have been in banking for 14 years. I am currently a commerical loan officer for a bank.<br /><br />You can read anywhere that people, including those who have taken a bankruptcy can go and get a mortgage tomorrow.<br /><br />Mortgage brokers are so eager to make commissions and investors are so eager to make $$$ they have lessened the underwriting standards to the point that ANYONE can get a mortgage, terrible credit, no $ down, etc.<br /><br />If you want to invest in mortgages, you'll be funding these loans (granted it will be a huge pool of loans) to all types of credit, low $$$ down which means they can walk away from that mortgage and lose nothing because they don't have any cash equity.<br /><br />In addition, prices have gone up so fast on real estate everyone is worried about a bubble. Would you like to invest in mortgages with others into a pool of $5billion.... only to find out that in a year the collateral (houses and real estate) is only worth $4billion due to an adjustment in the market?<br /><br />I DO NOT BELIEVE that the market will bubble and burst... but it will adjust reasonably.<br /><br />All that risk for only 5-5.5%????<br /><br />Some banks are giving 2-3 year CD's at 4.3 right now... I'd check that out first. Don't go long though... .with rates on the rise now is not the time to lock money in for a long time.<br /><br />I would only lock up 30% or so of your savings for 2-3 years, leaving the other liquid... and if rates go up, do another 30% for 2-3 years... so you have funds maturing every two years in case you need some.<br /><br />Just my thoughts.

 

[DJ]

Re: CMOs

JB,<br /><br />My thoughts were directed at "commercial" property. The return rates for a Wal Mart are less than a mom and pop, but still fairly steady and rock solid.

 

[KRS]

Re: CMOs

You may find more info by searching under REIT, Real Estate Investment Trusts, another way to buy into commercial RE.

 

[KRS]

Re: CMOs

Search under REIT, Real Estate Investment Trust, it may turn up more info.

 

[Vlad D Impeller]

Re: CMOs

So if i'm understanding this correctly, its like buying shares in real estate holdings, is that right?

 

[DJ]

Re: CMOs

So if i'm understanding this correctly, its like buying shares in real estate holdings, is that right? <br />

That is correct. REIT is another name for them.

 

[KRS]

Re: CMOs

With REIT's, you are buying the real estate, much like a mutual funds pools $$$ and buys shares of companies.... a REIT pools $$$ and buys real estate.<br /><br />I *THINK* that with CMO's, you are not buying the real estate, your funds are providing the capital for the buyer to make the purchase. Your pool of money is being "the bank" in that your money will advance to the seller, and your revenues are made as your investment (the loan) makes money (payments are made with interest).<br /><br />Both involve real estate, but one is an ownership of the dirt and another is an ownership of the mortgage.

 

[JB]

Re: CMOs

AME has it.<br /><br />The ones Greg recommends are Fannie Mae issues, principal is gov't insured, with an average life of about 3 yrs.<br /><br />If a lendee defaults, the government insurance pays the principal, which you simply reinvest in new paper. That way you "turn over" the paper in about 6 yrs and reinvest at rates current at the time.<br /><br />I think it is pretty clear that we wont see lower interest rates in the next 40-60 years. I will be long gone to the great fishing hole long before then.

 

[KRS]

Re: CMOs

Fannie Mae is the gov't agency that has money to lend. They make residential mortgages.<br /><br />As you know, anyone who has less than 20% downpayment is required to have mortgage insurance.... I don't believe that the full priciple is insured?! I think only the top 20% is, that way if the home is taken back and needs to be sold, the 20% insurance payment (or 15% or 10%) makes up for the loss of having to evict, not collect interest, clean up, and sell a "repo" home for less than typical market value, and hopefully repay the loan (not typically enough to fully repay it).<br /><br />As an investor, you want producing assets, right? When a mortgage is not paying, is behind, or is in foreclosure... it is a "non-earning asset", that is to say you own the investment but it's not paying you anything (and you thought 2.5% was bad return on your money).<br /><br />You don't have the $$$ to reinvest until the foreclosed home is finally sold.<br /><br />The life span is 3 yrs or so because most people refi by then.

 

[KRS]

Re: CMOs

I just can't stop posting.... I NEED HELP!!!<br /><br />3-6 year turnover sounds great... but let me present a scenario...<br /><br />Rates go up... significantly. No one is refinancing (the business that drives most mortgage brokerages). Few are buying. Your investment is tied up in 30 year mortgages (because it isn't turning over because no one is paying off their loans) at say.... 5.5%. Well.... if mortgage rates went up, be sure savings rates did too.<br /><br />Now bank CD's (fully insured) are paying 7.5% for a 1-2 year term... and you're getting 5.5% for the next 30.<br /><br />I think that money can be made, so long as it's a good rate, low risk, and fast turnover to keep rates current.... but if you end up going long in a stagnant investment pool, you'll have trouble keeping up with inflation.

 

[BoatBuoy]

Re: CMOs

JB, I'm sure you're doing your homework on the web, but here's a link that popped up for me - <br /> http://www.investopedia.com/terms/c/cmo.asp

 

[JB]

Re: CMOs

I think you have the mortgage insurance coverage backward, AME.<br /><br />The insurance insures the lender. . . the bank, and ultimately the CMO owner, against loss of principal from default. That is the amount of the loan, not the down payment. In the case of a default the bank (and CMO owner) get the principal back.<br /><br />As the loans (and the CMO) mature both interest and principal are paid to the CMO owner monthly. The smart investor then immediately reinvests the returned principal amount and as much as may be surplus of the interest. The investor is then able to "track" interest rates more closely than a bond or CD owner, and principal is protected just as well.<br /><br />As interest rates rise (a pretty safe bet) refins and defaults decrease and the "half life" of the paper increases, but there is still a constant turnover of principal, with the earnings steadily rising.<br /><br />That's my understanding, enhanced by Greg's explanation and web research.

 

[Ralph 123]

Re: CMOs

<br /><br />

<br /><br />Remember Peter Lynch's great advice: never investing anything you don't completely understand.<br /><br />Make sure you are highly diversified (esp as you near retirement)

 

[salty87]

Re: CMOs

a few clarifications:<br /><br />GSE (govt subsidized entities) such as Fannie Mae and Freddie Mac are backed by the full faith of the us govt. they are not insured themselves, just assumed that the govt will back them if there are any defaults...we're not talking about the actual mortgages being insured here, just the agencies that run this system. the agency redirects people's mortgage pymnts to the people who have invested in the security. <br /><br />by investing in one of the GSE CMO's, you are really buying people's mortgages (that essentially means you are lending money to people to buy a house). this facilitates the lending process by spreading risk and allowing lenders to move their money more times.<br /><br />thousands of mortgages are bundled together and sold as a block. there are different types of mortgages included and they don't all mature at the same time. this provides some diversity to the investor...and govt subsidized entities aren't supposed to be dealing in junk debt.<br /><br />as these home buyers pay their mortgages off, the investor is paid interest like any other debt. some of these homebuyers will be making extra payments, refinancing, and paying off their mortgages. when this happens, the CMO pays out principal to the investors early. that is one of the risks...you have to reinvest that money at the same rate or higher or you won't realize the 5 - 5.5% you were quoted.<br /><br />CMO's are different from REITs (real estate investment trust). when you invest in a REIT, you are dealing with equity not debt. in a REIT, you partially own real estate and make money off people paying rent and appreciation of property when it's sold. REITs are essentially mutual funds that invest in real estate.<br /><br />JB-<br />'As interest rates rise (a pretty safe bet) refins and defaults decrease and the "half life" of the paper increases, but there is still a constant turnover of principal, with the earnings steadily rising.'<br /><br />in this interest rate environment, that is a pretty good way to look at it.

 

[JB]

Re: CMOs

Home mortgage interest rates moved out of depression era rates and above 5% in the 50s and haven't been back since. Only in a deep depression or major crisis like 9/11 would they drop that far again. In the runaway inflation of the late 70s rates topped 13-15%.<br /><br />I think we are at a historic bottom and on the threshold of recovery. I see mortgage rates at 7-9% within three years.<br /><br />Guys like DJ, who recently bought a new house, will see the value of their low rate assumable mortgages add significantly to the market value of their homes.<br /><br />I bought a house in 1987 at 7.5% right after the big market "correction". When I sold it in 1989 I got 10% above market because the mortgage was assumable and new mortgages were at 11%.

 

[salty87]

Re: CMOs

i'm on my first mortgage, never heard of assumable.<br /><br />typically, how much extra does that cost when you get into a mortgage? is it a % or flat fee?