What process does an investor follow to successfully purchase mortgage notes?

Answer 1

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Answer 2

For most individual investors, buying mortgage notes is about the dumbest idea they could come up with.

To start with, you shouldn't put your entire portfolio in one asset class (let alone one narrowly defined asset subclass such as mortgage notes), so mortgage notes should probably account for no more than 20% of your total portfolio (assuming you are an older income-oriented investor; if you are young, cut that allocation down to 5%).

For adequate diversification within the class, you need to buy at least 30 notes. Assuming that the average note sells for $200,000, you need to be able to allocate $6 million to mortgage notes. But if you have $6 million to allocate to mortgage-backed securities, why would you want to screw around with illiquid mortgage notes when there is a liquid market for mortgage-backed bonds and strips on them? With mortgage notes, you have no liquidity and long duration; with mortgage strips, you have liquidity and you can engineer any duration you want, including a negative one (which, in my opinion, would be handy these days)...

Finally, ask yourself this question: why would someone want to sell a mortgage note to you rather than to Fannie Mae? The answer is obvious: because Fannie Mae knows how to price mortgages and understands the risks involved, and you have no clue, so you will gladly pay more than Fannie Mae...