How Do American Mortgages Work? Part 8: Investors

The end of the line for the secondary mortgage market process is the investors themselves. Investors can be anyone but typically are foreign governments, pension funds, insurance companies, banks, GSEs and hedge funds. What kind of return are they looking for depends on what credit ranking of MBS, CMOs, or CDOs they acquire. Typically, more safe investors such as governments, pension funds, insurance companies, or banks are looking for a high credit investment. These investments have low predicted default rate. Investors looking for higher returns will more than likely look towards a low credit rating investment because the interest rate will have a higher return yield, hedge funds are usually investors of this type.

While America’s secondary market is massive, after a mortgage is closed it can end up in many different channels by the end of the month, whether it be a CMO or a CDO deal. Borrowers have little knowledge of the extent of what happens with their mortgage after closing and how much it has been split up, traded, and merged with other mortgages. With the start of the lending process at the Mortgage Originator and could be ending up a number of places from a bank that likes the high credit safety of one investment to a hedge fund just trying to make the most profit as quick as possible choosing a low credit investment. The secondary mortgage market is massive and complex that handles millions of mortgages a day.

 

http://www.investopedia.com/articles/pf/07/secondary_mortgage.asp

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