As one of the largest financial markets, the mortgage industry plays an important role in the economy. Major mortgage corporations like banks and other lenders invest significant funds into trading assets to seek investment returns. This article analyzes how mortgage corporations make investment decisions and the main trading assets they invest in.
Mortgage corporations have large capital available for investments
Mortgage lenders like banks accumulate large deposits from customers that become capital available for various investments. Providing mortgages is still a major part of their business, but the funds leftover after meeting baseline regulatory requirements allow them room to invest in other assets. Trading financial securities can generate additional revenue.
Mortgage investment corporations target fixed-income assets
Given the size and regulated nature of most mortgage lenders, they tend to pursue relatively conservative investment strategies. Fixed-income assets like government and corporate bonds are a common target. These assets provide regular coupon payments to produce steady investment income without major price volatility risks.
Mortgage corporations also invest in mortgage-backed securities
Major mortgage originators in the US like Fannie Mae and Freddie Mac package mortgages into mortgage-backed securities (MBS) to sell to investors. Large mortgage lenders have trading desks to actively buy and sell MBS for profits from price fluctuations. The mortgage business gives them informational advantages in analyzing and trading MBS.
Equity investment is limited for mortgage corporations
While bonds and MBS are suitable for mortgage lenders’ investment objectives, direct investment into equities and alternative assets is less common. Strict risk management guidelines at most regulated mortgage firms limit equity exposure. But some alternative lending startups without deposits have more flexibility to expand into other assets.
Trading operations depend on corporations’ business models
In general, large depository mortgage lenders like commercial banks invest heavily in fixed-income trading aligned with their core business. Mortgage banks and mortgage REITs focused narrowly on mortgages also invest mainly in MBS. In contrast, independent mortgage brokerages without capital for investing mainly focus on mortgage origination services.
Mortgage lending corporations have significant capital from customer deposits that allow them to invest and trade various securities to seek extra profits beyond mortgage operations. Their investment activity focuses on fixed-income assets and mortgage-backed securities closely related to their core mortgage business.