See: Mortgage.
You’ve got a few hundred thousand bucks in the bankie-pie and you’re looking to invest the funds. You decide to go into the mortgage business.
You go through all the licensing and legal procedures to become an official mortgage lender in your state. Once all the paperwork is filed and approved, you’re ready to loan cash. You still just have the few hundred thousand bucks to make the mortgage. You’re a legal mortgaging company...just not a very well-capitalized version. But you’ve gone this far, so you decide to push ahead.
You basically have enough for one mortgage. But what if that one mortgage doesn’t pay? If they default, you lose everything.
Even if you think mortgages are good investment, it makes sense to diversify. Instead of directly loaning the money out for a single mortgage, you can invest those funds in a Mortgage Cash Flow Obligation. It lets you participate in a bunch of mortgages at once.
Buy an MCFO and you get access to revenue generated from a pool of mortgages. It’s considered a pass-through investment, with the payments from homeowners passing through to the holders of the associated MCFO. So instead of payments from a single client in your thread-bare mortgage business, your payments are derived from a group of similar mortgages. An individual default doesn’t dry up your entire return.
The MCFO comes with its own downside. You don’t actually have a claim on the underlying property. If you loan money out for individual mortgages, you can respond to any defaults with foreclosure and take possession of the house. You don’t have that recourse with an MCFO.
Related or Semi-related Video
Finance: What is a Mortgage?345 Views
Finance allah shmoop shmoop What is a mortgage Well people
a mortgage is just dead it's alone but one with
special tax treatment For most people simply put Any interest
you pay on a mortgage to buy a home is
tax deductible Morty morton's inputs down a hundred thousand bucks
to buy a home that costs four hundred big ones
his mortgages three hundred grand at five percent interest per
year So that's fifteen thousand dollars a year he pays
to rent the money from the bank which he uses
to buy his dream home with the loop de loop
waterslide Morty earns one hundred grand a year and pays
tax on his last fifteen thousand of earnings soas faras
The irs is concerned since morty can deduct his fifteen
thousand dollars in interest against his earnings he does not
in fact earn taxable wages of one hundred grand annually
Instead he earns taxable wages of eighty five thousand dollars
a year Essentially with government is doing is sharing in
some of the cost of renting the money Taub i'm
ortiz home well why would the u s government be
so charitable Well because home ownership has been integral part
of the american dream since the u s of a
i po'ed in seventeen seventy six easy access to mortgages
and then home buying can be a hugely beneficial asset
In the vast majority of cases homes create family stability
a store of wealth and tax dollars for local schools
in the form of real estate taxes So don't feel
bad about splurging on that water slide there Morty Just 00:01:42.93 --> [endTime] remember you're doing it for the kids Hello
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