Mortgage Investing in Other People’s Houses

The traditional method of buying a home in the United States works like this - you put a small down payment on a home, pay off the rest over time, and watch the value of the portion of the house that you own, the equity, increase over time. Your house becomes an investment, and in most years, that investment increases in value. At retirement, you can sell it and use the money for a smaller home, or you can extract the value of the home through a reverse mortgage, which pays you until the house is sold.

For all practical purposes, your home is an investment, just like any other. While you probably didn’t buy it for that reason, it will help you financially over time. It’s interesting to note, however, that it’s possible to not only invest in your own home, but to invest in other people’s homes as well.

An investment opportunity known as Collateralized Mortgage Obligations, or CMO, is one of a number of investment options known as mortgage-backed securities. These securities are essentially part of a pool of mortgages that have been purchased from their lenders by investors. In essence, you and the other people who buy these securities own shares of them and receive, indirectly, the mortgage principal and interest payments made by the homeowners. Lenders frequently sell mortgages to pools of investors in order to free up their money to fund other homes. It’s a cycle that repeats over time - lenders lend money to a buyer, then turn around at some point in the future to sell the mortgage to someone else.

These securities are issued and backed by government sponsored enterprises, such as the Government National Mortgage Association (Ginnie Mae), Fannie Mae, or the Federal Home Loan Mortgage Corporation, otherwise known as Freddie Mac.

Securities purchased through government agencies, such as Ginnie Mae, are backed in full by the Federal government, so they make fairly safe investments. Those purchased through quasi-government agencies, such as Fannie Mae, aren’t fully protected by the Government, but are generally regarded as safe investments due to the close ties these agencies have with Uncle Sam.

The term or life of a CMO can vary, as the terms of the mortgages that fund them can vary, as owners pay off their houses or refinance them. Similarly, the yield can vary widely.

A CMO may or may not be a good investment option for you. They could be a part of a fairly diverse portfolio and it never hurts to spread your money around. They certainly represent an interesting alternative to stocks or bonds, but they aren’t well known and can be fairly complicated. Anyone considering investing in them should do some extensive research to see if they might be a good investment vehicle for you. If in doubt, and even if you aren’t, it might be a good idea to discuss this investment option with a competent financial planner.