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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: GraceZ who wrote (14917)	11/8/2003 8:31:44 PM
From: Elroy Jetson	Read Replies (1) \| Respond to of 306849

The problem with the value of "Mortgage Residuals" is that it is not known how long the "dividends" will be paid until all the underlying loans in the Collateralized Mortgage Obligation are repaid. Early re-payment of the underlying loans means that much more of the "dividend" you received was actually an early "return of principal" - except you didn't realize that at the time. So generally the value of Mortgage Residuals moves opposite to bonds in an exaggerated manner. Declining mortgage rates decimates the value of Mortgage Residuals while rising rates can wildly increase the value of Mortgage Residuals. Regular Whole CMOs which include both the "Residual" and "Fixed Duration Tranche" are obviously riskier than normal bonds but far safer than Residuals. I think I remember years ago getting left holding the bag on a mortgage REIT that owned some of these. It was my very first lesson in, "If a dividend looks too good to be true...."