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Archive for July, 2010

Although CMOs entitle investors to payments of principal and interest, they differ from corporate bonds and Treasury securities in significant ways. Corporate and Treasury bonds are issued with stated maturities. The purchase of a bond from an investor is essentially a loan to the issuer in the amount of the principal, or face amount, of the bond for a prescribed period of time in return for a specified annual rate of interest. The bondholder receives interest, generally in semiannual payments, until the bond is redeemed. When the bond matures, or is called by the issuer, the issuer returns face value of the bond to the investor in a single principal payment.

With a CMO, the ultimate borrower is the homeowner who takes who takes on a mortgage loan. Because the homeowner’s monthly payments include both interest and principal, the mortgage security investor’s principal is returned over the life of the security, or amortized rather than repaid in a single lump sum at maturity. CMOs provide monthly or quarterly payments to investors which include varying amounts of both principal and interest. As the principal is repaid (or prepaid), the interest payments become smaller because they are based on a lower amount of outstanding principal.

A mortgage security “matures” when the investor receives the final principal payment. Most CMO tranches have a stated maturity based on the last date on which the principal from the collateral could be paid in full. This date is theoretical, because it assumes no prepayments on the underlying mortgage loans.

Mortgage securities are more often discussed in terms of their average life rather than their stated maturity date. Technically, the average life is defined on the average time to receipt of each dollar of principal, weighted by the amount of each principal payment. In simpler terms, the average life is the average time that the principal dollar in the pool is expected to be outstanding, based on certain assumptions about prepayment speeds. If prepayment speeds are faster than expected, the average life of the CMO will be shorter than the original estimate; if prepayment speeds are slower, the CMOs average life will obviously be extended. While some CMO tranches are specifically designed to minimize the effects of variable prepayment rates, the average life of the security is always a best estimate, contingent on how closely the actual prepayment speeds of the underlying mortgage loans match the assumptions.

CALCULATING PREPAYMENT SPEEDS

Estimates based on historic prepayment rates for each particular type of mortgage loan under various economic conditions from various geographical areas, are factored into the offering price, yield, and market value of a CMO. The realization of the average life and yield estimates depends on the accuracy of the prepayment assumptions. Different standard and proprietary prepayment rates exist, but one of the most common ways of expressing prepayment rates is in terms of the Standard Prepayment Model of The Bond Market Association. Developed in 1985 for specific application to mortgage securities, the Association’s model assumes that new mortgage loans are less likely to be prepaid than somewhat older, more seasoned mortgage loans. Projected and historical prepayment rates are often expressed as “percentage of PSA” (Prepayment Speed Assumptions).

INTEREST RATES AND YIELD ON CMOS

The interest rates paid on CMOs will be lower than the interest rates paid on the underlying mortgage loans, because the issuer retains a portion of the interest paid by the mortgage borrower as a servicing fee for creating the security and collecting and distributing the monthly payments to investors. Still, newly issued mortgage securities carry higher estimated yields than comparable Treasury securities. In part, this is because the interest rates paid by home buyers are higher than the interest rates paid by the U.S> government. However, the higher interest rates on mortgage securities also reflect compensation for the uncertainty of their average lives.

As with any bond, the yield on a CMO depends on the purchase “price” in relation to the interest rate and the length of time the investor’s principal remains outstanding. CMO yields are often quoted in relation to yields on Treasury securities with maturities closest to the CMOs estimated average life. The estimated yield on a CMO reflects its estimated average life based on the assumed prepayment rates for the underlying mortgage loans. If actual prepayment rates are faster or slower than anticipated, the investor who holds the CMO until it is fully paid may realize a different yield. For securities purchased at a discount to face value, faster prepayment rates will increase the yield-to-maturity, while slower prepayment rates will reduce it. For securities purchased at a premium, faster prepayment rates will reduce the yield-to-maturity, while slower rates will increase it. For securities purchased at face value (par), these effects should be minimal.

Because CMOs pay monthly or quarterly, as opposed to the semi-annual interest payment schedule for most bonds, CMO investors can use their interest income much earlier than other bond investors. Therefore, CMOs are often discussed in terms of their bond equivalent yield, which is the actual CMO yield adjusted to account for its greater present value resulting from more frequent interest payments.

THE EFFECT OF INTEREST RATES ON CMO VALUES AND PREPAYMENT RATES

Prevailing market interest rates affect CMOs in two major ways. First, as with any bonds, when interest rates rise, the market price or value of most types of outstanding CMO tranches drops in proportion to the time remaining to the estimated maturity. Conversely, when rates fall, prices of outstanding CMOs generally rise, creating the opportunity for capital appreciation if the CMO is sold prior to the time when the principal is fully repaid.

Movements in market interest rates have a greater effect on CMOs than on other fixed-interest obligations because rate movements affect the underlying mortgage loan prepayment rates and, consequently, the CMO’s average life and yield. When interest rates decline, homeowners are more likely to refinance their mortgages or purchase new homes to take advantage of the lower cost of financing. Prepayment speeds therefore accelerate in a declining interest rate environment. When rates rise, homeowners are more likely to “stay put”, causing prepayment speeds to slow.

What is good for the homebuyer is not necessarily good for the CMO investor. If interest rates fall and prepayment speeds accelerate, CMO investors may find they get their principal back sooner than expected and have to reinvest it at lower interest rates (”call risk”). If interest rates rise and prepayment speeds are slower, investors may find their principal committed for a longer period of time, causing them to miss the opportunity to earn a higher rate of interest (extension risk). Therefore, investors should carefully consider the effect that sharp moves in interest rates would have on the performance of their CMO investment.

For the above reasons described, CMOs are considered by a select few platforms to be an asset that is easy to validate and prove ownership. In addition, the trading platform is able to be added as the CMOs Beneficiary allowing for the appropriate financing lines to be obtained. The result is a CMO asset that can be purchased for pennies on the dollar with nominal returns and subsequently placed and traded successfully in a Private Trading Program with yields the owner once only dreamed of.

InvestorEarth.com is an educational site dedicated to providing investors proven, high yield Private Trading Investments in a global recession market. Please visit http://www.investorearth.com.

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“I just need enough cash to tide me over until payday.” Sounds familiar to you? I’m betting it does. We constantly find ads to this effect on the radio, television, the Internet, and even in the mail. The type of loan being referred to, of course, is payday loans. And they come at a very high price, too, by the way.

Payday loans have become a way for people to get fast cash. Check cashers, finance companies and others are making small, short-term, high-rate payday loans that go by a variety of names. Sometimes, they’re called cash advance loans, check advance loans, post-dated check loans or deferred deposit check loans.

But how do payday loans work? Well, usually, a borrower writes a personal check payable to the lender for the amount he or she wishes to borrow plus a fee. Afterwards, the company or the lending institution would then give the borrower the amount of money in the check minus the fee. The fees charged for payday loans are usually a percentage of the face value of the check. Sometimes, the fee may be charged per amount borrowed. For instance, for every $100 loan you borrow, you get charged a fee of $50. If the loan is extended, a process referred to as “roll-over”, you are obliged to pay the additional fees that could incur. So for example, you make an extension of two weeks for your $100 loan. That means, you pay a total of $150 in fees, provided that one week equals to a $50 fee.

The Paperwork

Under the Truth in Lending Act, the cost of payday loans, like other types of credit, must be disclosed to the borrower. Other pieces of relevant information that you must receive in writing include the finance charge or the dollar amount and the annual percentage rate or APR. The APR refers to the cost of credit on a yearly basis.

Fast Cash, High Rates

A payday loan, which is a cash advance loan secured by a personal check, is a very expensive source of credit. But despite this, many people still opt for payday loans. To explain to you just how expensive payday loans can be, let’s say that you need to borrow $100 and so you write a check for $115 which would pay your loan for up to 14 days. The check casher or payday lender agrees to hold the check until your next payday. At that time, depending on the particular plan, the lender deposits the check. You then redeem the check by paying the $115 in cash. If you can’t make the payment, you can also roll-over the check by paying a fee to extend the loan for another two weeks. In this example, the lender charges you $15 as fee and at the same time, the loan costs you 391 percent APR. If you roll-over the loan three times, the finance charge would climb to $60 to borrow $100.

The average rate for 30-year fixed loans this week was 4.54 percent, down from 4.56 last week, mortgage company Freddie Mac said Thursday. That’s the lowest since Freddie Mac began tracking rates in 1971. The last time …
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ST. PAUL, Minn. — As Minnesota governor, Independence Party candidate Tom Horner says he would “take a hard look” at tax exemptions and deductions, including mortgage interest for homeowners. Horner said …
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While Frank, Mac, and Dennis try their hand at real estate, Dee arranges to be a surrogate mother to a wealthy couple with a sweet house.
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CNBC’s Suze Orman discusses the increase in defaults on student loans amid high unemployment and offers financial planning tips for students in debt. (Today Show) Suze Orman – Business – Financial services – CNBC – Today
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Property investment has become a popular choice for people who want to get into the business of investment. It is only natural with all the tax and mortgage benefits associated with a property investment. But property investments involve a lot of risk factors. To protect yourself from these perils, you need investment property insurance.

The Benefits of Investment Property Insurance

Investment property insurance covers your losses or damages incurred when there are problems arising from your investment property. Investment property insurance offers coverage for natural calamities. Examples of calamities and disasters that investment property insurance can cover are fires, earthquakes, floods, and others which can destroy your property. Without investment property insurance, the cost of reconstructing or repairing your property can be hard on your budget.

If you get sued, investment property insurance can pay for all associated legal fees, including court fees and lawyer’s bill. Instances where negligence brings injury or harm to someone while in your property’s premises can merit you a lawsuit and without investment property insurance, you are certainly vulnerable to damages that arise from that lawsuit. The way lucrative legal deals are going now, your investment property insurance can prove to be the last line of defense for your business not to go bankrupt. Investment property insurance will help protect from these kinds of losses.

Types of Investment Property Insurance

Investment property insurance have two basic types: residential investment property insurance and commercial investment property insurance. The residential type of investment property insurance covers all types of residential units, such as homes, apartments, condo units, tenements, and the like. Commercial investment property insurance on the other hand pays for damages on office units, buildings, centers, malls, et cetera.

Residential investment property insurance protects your biggest investment, which is your home. This type of investment property insurance covers your home from damages caused by perils, such as fires or vandalism. The actual structure of your house is not the only thing covered by residential investment property insurance. This type of investment property insurance also covers the contents of your house, including furnishings and furniture. A comprehensive residential investment property insurance policy may also include coverage for associated structures like swimming pools, barn houses, gazebos, patios, et cetera.

Landlords who let their properties to other people may also get coverage through a residential type of investment property insurance policy. In this case, the investment property insurance protects the landlord from damages or loss caused accidents or disasters. An investment property insurance policy may also protect landlords from business interruption or loss caused when a tenant stops paying rents. Tenants may also get investment property insurance to protect themselves from damages or losses caused by disasters or catastrophes while staying in a property for rent.

The second type of investment property insurance offers protection for commercial properties. Commercial investment property insurance protects business owners or business operators from damages or loss caused by common perils, such as fires, floods, water damage. Like its residential counterpart, commercial investment property insurance provides general coverage for your commercial property like office spaces, units, including equipment, facilities, machinery, and other contents.

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