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Alternative investment types beyond stocks and bonds often involve real estate holdings, with a prominent part of the market dedicated to buying and selling mortgages. The process by which individuals’ mortgages are bundled into securities and sold on the secondary market is an important element of investment banking, but there are risks to dealing in mortgage-backed securities (MBS). Namely, the financial crisis that reached an inflection point in 2008 with the collapse of Lehman Brothers was largely predicated on problems in the real estate investment market.
Professionals who want to become involved in MBS trading or increase their activity in the investment space should be aware of how secondary mortgage buying and selling works, refresh their knowledge of how the Great Recession unfolded, and note the changes that crisis caused in the MBS market.
The nature of the secondary mortgage market
Buying and selling mortgages as securities enables underwriters to lend money to homebuyers even when they cannot use their own funds to cover an entire home loan for its full duration. This process makes it possible for banks of all sizes to offer loans, as Investopedia noted. The two main buyers of loans are government-chartered financial entities: the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, also called Fannie Mae and Freddie Mac. Bankrate explained that the first of these was created in 1930 and the second followed in 1968 to generate more balance in the market.
Fannie Mae and Freddie Mac buy up many loans issued by banks, bundle them into mortgage-backed securities, and offer them on the investment market. This process of funding loans and turning them into securities has caused interest rates to fall and become standardized―smaller banks in all regions can offer mortgages knowing that large-scale buyers will make them financially viable.
The mortgage market is a place for investors and funds to put their own money into MBS products, counting on these investments to appreciate in value over time. The market carries risks, however, and its weaknesses were exposed during the most recent major financial crisis.
Property investment and the financial crisis
With MBS value tied to the prices of real estate, housing crises have a tremendously negative impact on mortgage investment. The Street pointed out that this scenario played out in 2007 and 2008. Banks had spent the years leading up to that crash issuing loans with high degrees of risk, taking advantage of low interest rates and rising house prices to issue subprime mortgages, meaning loans designed for buyers whose finances and credit history did not qualify them for standard, low-rate loans.
The collapse of the housing-value bubble devastated the buyers who had recently purchased homes through subprime mortgages. Rising rates and diminishing equity forced many people into foreclosure. Banks lost money on the loans they had issued and home values crashed across the board. The Street noted that this crash, in turn, hit investors and funds with MBS in their portfolios.
Investors naturally moved away from MBS products as the crisis escalated into a recession. These real estate investments revealed a risky side that fund managers and individuals had not expected to encounter. The federal government had to step in and make its own large investment in properties to ensure interest rates didn’t rise precipitously. According to Investopedia, government investment in MBSes totaled $1.75 trillion.
MBS investment after the recession
Despite the damage done to real estate securities investment during the Great Recession, the market did emerge from the crisis. Investopedia explained that the theory underlying MBS value remains sound―when people are able to repay their mortgages, they do so, meaning securities made up of mortgages have enduring value in a functional economy.
The strain of the decade-old financial collapse remains evident in the MBS space, with more than $1 trillion worth of real estate securities still owned by the federal government. Authorities appear confident that a replay of the Great Recession is not imminent: Investopedia added that the Fed began to sell off its MBS holdings in 2017. The future of the market may rely on investors and fund managers buying MBS offerings more carefully in the future, watching the signals from the housing market more closely than they did during 2006 and 2007.
Online MSF courses about real estate investing
Professionals interested in becoming more involved in secondary-market real estate investment can gain valuable information while studying for Northeastern University’s Online Master’s in Finance. Courses included in the Online MSF curriculum allow students to delve more deeply into this specialized corner of the investment market. With individuals and fund managers still investing in MBS products, there will be a continuing need for real estate investment analysts to assist buyers in their decisions.
The financial analyst career path is promising, according to the U.S. Bureau of Labor Statistics. Over the decade between 2016 and 2026, U.S. employment for investment analysts will rise 11 percent, the BLS projected. This is more than the 7 percent growth expected across all professions. In 2017, the median pay for an analyst was $84,300. Specializing in real estate investment or using this skill as a professional differentiator will require in-depth knowledge, which is where Online MSF courses can prove invaluable.
The Real Estate Finance and Investment course in the D’Amore-McKim School of Business Online MSF program is an essential overview of the way properties function as investment items. Students will learn about the process of securing financing, the way the mortgage market operates, and the details of long-term investment strategies. Whether professionals are hoping to enter real estate full-time or plan to cover a wide range of investment areas, the course provides a useful foundation.
The Online modality allows professionals the flexibility to study on their own time while continuing their current full-time jobs. To learn more about the Online MSF program at Northeastern University, download a program brochure here.
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Bankrate – Secondary Mortgage Market
New York Fed – The Rising Gap Between Primary and Secondary Mortgage Rates
Investopedia- Secondary Mortgage Market
The Street – What Was The Subprime Mortgage Crisis and How Did It Happen?
U.S. Securities and Exchange Commission – Asset-Backed Securities