Other Conduit Investments
In addition to mutual funds, there are many other ways to pool investments with others and within an organized structure, A mortgage pool is a mutual fund-like company that specializes in taking shares of a collection of mortgages. These mortgage-backed securities are offered by lending institutions sponsored or guaranteed by the U.S. government.
The widespread failure of mortgage poolâ "based investments in 2007ÃƒÂ¢ "2009 proves that excessive risk invariably causes a strategy to fail.
These organizations include the Government National Mortgage Association (GNMA
), also known as Ginnie Mae; the Federal National Mortgage Association (FNMA
), or Fannie Mae, which also sells REMICs; and the Federal Home Loan Mortgage Corporation (FHLMC)
, or Freddie Mac. All of these market a mortgage-pool product called the Real Estate Mortgage Investment Conduit (REMIC)
. These mortgage pools have become controversial in recent years, due to excessive marketing and lax credit standards among participating lenders. Collectively, these organizations created a secondary market
for real estate lending. Local institutions underwrote loans and then sold those loans to one of the big national groups, which then placed the mortgage into a pool with thousands of other loans and sold shares to investors. At least to some extent, excessive secondary market activity is what led to the housing bubble and crash of 2007ÃƒÂ¢ "2009.
To learn more about the secondary market for real estate and mortgage pools, check the websites for each of the three major organizations:
Another way to own real estate but have it act like stock is through the Real Estate Investment Trust (REIT)
. This is a pooled investment that combines the money of thousands of investors to buy, construct, or develop real estate properties. REIT shares trade on public exchanges just like stocks, making them very liquid. There are many types of conduits that specialize in all markets: stocks (equity), debt, and real estate. The right one depends on your own risk tolerance and personal investment goals.
Key Point The REIT is a good way to invest in real estate but maintain liquidity and diversification.
By Michael C. Thomsett