Russeil Moidowan THE BOTTOM LINE AS INTEREST rates have - been moving up lately, I ‘wanted to address an invest- ment that lets investors take advantage of the increases and is very flexible. - The reasons Mortgage-Backed Securities (MBS) have been gaining in popularity since their introduction in the late ’80s are easy to discern: MBSs provide a regular monthly income, excellent liquidity, very attractive yields and as they are guaranteed by the federal govern- ment through the Canada Mortgage and Housing Corporation (CMHC), they are of the highest credit quality "as well. Investing in securities Mortgage-backed securities gaining popularity This government guarantee is very important because it covers timely payment of both principal and interest. Should an issuer or mortgagor, for whatever reason, nol have the full amount due availible by the payment date, CMHC will step in and make good the obliga- tion, This way the investor is never inconvenienced, But how do they work? Many investors are familiar with the investment attributes of mort- gage-back securities but ure not sure exactly how they work and how the payments are calculated. First, let's review what a mort- gage-back security is. MBSs are undivided interests in government- insured first residential mortgages. This means that you. as an investor, are investing in a pool of mortgages and that borrowers, on the other side of the pool, are homeowners, mak- ing mortgage payments, just as you have likely done. These mortgagors have borrowed money from banks and trust compa- nies to finance home purchases. A bank or trust company therefore has a pool of mortgage debt which it repackages into separate invest- ments io sell to individual investors in minimum amounts of $10,000. The mortgagors make regular, equal blended payments of principal and interest into the pool which are then collected by the issuer and par- tially “passed through” to the indi- vidual MBS investors. Similar to the payments made by the mortgagors, the investors receive Development Comm. wins three U.S. awards BUSINESS BRIEFS Compiled by Kate Zimmerman North Shore business groups and individ- uals wishing to submit items to Business Briefs can fax them to the attention of Kate Zimmerman at 985-2104. Commission wins American award The North Shore Economic Development Commission has scooped up three awards and an honorable mention from the American Economic Develop- ment Council (AEDC) for 1994 Sales Literature and Promotional Materials. "=MONROEY’ SHOCKS AND STRUTS: ENDS JULY 2 ; a Buy One Shock at Reg. Price f and Get the 2nd Shock at 1/2 PRICE This annual competition recog- nizes the best efforts of economic development organizations in cre- ating marketing materials that will attract and retain business and industry and promote tourism and See NSEDC page 32 TRUCKS! 4Xa'sI TRUCKS! EXT-CABS! Selection beyond compare! ‘93 Chevy Cheyenne 6.5 turbo diesel 4x4. Only 19,000 km. Only 20 mins. from the i North Shore and such a short drive to save plenty. ‘92 Chevy reg. cab 4x4 or ‘92 GMC long box 2 wheel drive. Check out this ‘91 1 FORD 4x4 F250 ext-cab 7.3 litre “diesel”, fully loaded | Lariat XLT automatic. For a terrific selection’ - cross over the bridge to Westminster i Chevrolet. blended monthly payments of prin- cipal and interest. All of the princi- pal paid by the mortgagors is passed through to the investors while the interest portion is determined by applying the coupon on the MBS to the remaining principal owing on the initial investment. In addition to regular principal and interest payments, many mort- gages allow prepayments. A mortgage-backed security which allows prepayments is called an “open pool,” In case of an open pool, MBS, these unscheduled pre- payments are also passed through to the investor whereas in the case of a “closed pool,” no prepayments are allowed. Therefore, the cash flow of a closed MBS is certain white the cash flow of an open pool is not because it is impossible to anticipate when an individual mortgagor is going to prepay his or her mortgage. However, with an open pool, because you are having your princi- pal returned earlier than anticipated, the yield you are receiving is actual- ly enhanced. On the other hand, you are then faced with having to rein- vest unscheduled amounts of princi- pal. Mortgage-backed securities are an excellent investment for those who are retired or require a monthly income from their investments. There are many different pools available with different terms to maturity and very attractive returns. You should consult a qualified investment adviser to determine if MBSs are right for you and find the issue that best meets your needs. Russell is an investment adviser in Vancouver, He advises on invest- mens management and retirement planning. Write to Russell at P.O. 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