Question

Your broker calls to offer you the investment opportunity of a lifetime, the chance to invest in mortgage backed securities. The broker explains that these securities are entitled to the principal and interest payments received from a pool of residential mortgages. List some of the questions you would ask your broker to assess the risk of this investment opportunity. Questions you would ask include: (Select the best choice below.)

___A. Will borrowers soon be experiencing an interest rate increase because they took out a mortgage with a low initial rate that was adjustable after a period of time? ___B. Percentage of properties in the region that are "under water" (homeowners owe more than they borrowed) or in foreclosure. ___C. Type of real estate (commercial properties offer less liquidity if the market turns sour, because empty homes can be rented for revenue). ___D. Quality of real estate (is it in a good condition, or would there need to be repairs prior to sale?) ___E. What percentage of borrowers are behind on their mortgage payments? ___F. Creditworthiness of borrowers (how likely is it that borrowers will lose their job and be unable to make payments on a timely basis?). ___G. Real estate location (after all, the three most important determinants of real estate price are "location, location, location"). ___H. Precedence in bankruptcy (would other lenders have a senior claim to properties in bankruptcy?).

Answer 1

All of the questions have to be asked to the broker, so the answer is I. All of the above.

A. Will borrowers soon be experiencing an interest rate increase because they took out a mortgage with a low initial rate that was adjustable after a period of time?

B. Percentage of properties in the region that are "under water" (homeowners owe more than they borrowed) or in foreclosure.

___C. Type of real estate (commercial properties offer less liquidity if the market turns sour, because empty homes can be rented for revenue).

___D. Quality of real estate (is it in a good condition, or would there need to be repairs prior to sale?)

___E. What percentage of borrowers are behind on their mortgage payments?

___F. Creditworthiness of borrowers (how likely is it that borrowers will lose their job and be unable to make payments on a timely basis?).

___G. Real estate location (after all, the three most important determinants of real estate price are "location, location, location").

___H. Precedence in bankruptcy (would other lenders have a senior claim to properties in bankruptcy?).