The Mortgage Industry for Investors

Even if you don’t want a home loan, the mortgage industry may still be of interest to you. For savvy investors, owning a piece of this huge market may be a wise strategy. It’s not necessary to make mortgages yourself to profit from them; many investors invest in Real Estate Investment Trusts (REITs), which are publicly-traded companies that own mortgages and other real estate investments. Stock in a REIT can be easily bought and sold on the public stock exchange. Because a REIT is a pass-through entity, or a company that is allowed to pass on profits to investors without corporate taxation, it often delivers an attractive return on investment. Currently, over 300 publicly-traded REITs exist in the United States, with total assets of over $300 billion.

REITs offer some advantages over traditional stock purchases, since unlike other stocks, they all pay dividends. In addition, they do tend to yield a better-than-average return when compared with various stock indices.

Investors may also choose to purchase stock in non-REIT mortgage companies. The two most common investment vehicles are holdings in Fannie Mae and Freddie Mac, the two quasi-public companies that dominate the secondary mortgage market, and are publicly traded on the NYSE as FNM and FRE, respectively.

Some more adventurous investors choose to take a more direct approach, buying distressed properties, repairing them, and then selling them to sub-prime buyers directly, rather than through a bank—a strategy that comes with high risks, but also potentially high rewards. Often done in blighted areas in need of redevelopment, this strategy places the investor, rather than the mortgage company, in the role of note-holder, with the buyer making payments directly to the investor.