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Protecting Your Mortgage Assets

Managers of mortgage-backed funds employ several strategies to protect investors against an accelerating prepayment pace resulting from low interest rates.

TRADING out of higher-coupon mortgages that have fast prepayment rates and buying lower-coupon mortgages that probably won't be paid off as early.

INVESTING in defensive parts of collaterized mortgage bonds that have some prepayment protection.

BUYING older, seasoned mortgages that have already been through one or more refinancing cycles. These tend to be prepaid at a slower rate than newer ones.

PURCHASING Fannie Mae securities that charge a penalty to borrowers who want to prepay.

DATA: BUSINESS WEEK


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Updated Dec. 4, 1997 by bwwebmaster
Copyright 1997, Bloomberg L.P.
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