Hello, my name is Mark Griffith, and this
is a brief introduction to mortgage backed
securities. How do they work? What are they?
Mortgage backed securities are essentially
a way of packaging several different mortgages
into one instrument. And what happens is that
you effectively buy parts of other peoples
mortgages, and they're repaying their mortgages
to you. This, therefore, is a good way to
convert a fixed sum of money into a stream
of income that you'll receive. Again, the
devil is in the details, so you need to consider
are these fixed rate mortgages, are they variable
rate mortgages, and are they backed. For example,
are they backed by the government? What's
the risk of defaulting? They have names like
Ginnie Mae, Freddie Mac, and they sound quite
homely, but the important details are the
same as with any other financial institution.
How likely is the default? What stage are
you in the property or real estate investment
cycle? Are interest rates going up or going
down? This will also affect the value of the
payments you receive. And what are the terms
under which you receive them? So, remember
to do your homework, and remember to think
clearly about what it is you want. What kind
of payments you want, over what period, with
what risk of default. Do you want the payments
to be variable? Do you want them to be fixed?
They are effectively bunches or parcels of
mortgages, which have been bought off the
original lender, and you have now become the
lender. You buy that risk, and you are receiving
a stream of income in return. And like anything,
the phrase safe as houses is deceptive. Some
houses are safe, some aren't, and mortgages
based on houses can be safe, or sometimes
they can be risky. So, look at he detail.
Once you've decided what you want, how you're
going to do it, what terms, what kind of risk
you're willing to accept, off you go. This
is a way of turning fixed sums of money into
streams of income. Good luck.
