How Are Mortgage Fund Ratings Issued?

A mortgage mutual fund is subject to the same ratings process used to issue all mutual fund ratings. Rating organizations use financial modeling based on items like volatility, price and interest payment to determine the relative value of the mortgage fund. However, since mortgage funds helped contribute to the financial crisis of 2007, these ratings were discovered to be very inaccurate in the coming years. Today, mortgage-backed securities and their funds tend to be considered extremely risky or even worthless by most raters.

Mutual Fund Rating Terms

There are several terms used to describe the process of rating mutual funds. The first term is price, which is simply a measure of the actual going price of a mutual fund. The second term is interest payment, which is also listed in simple terms by the issuing institution. An analyst will also use a fund's volatility, or likelihood to provide consistent returns, as a measure in its overall worth. Volatility is very hard to calculate. In general, it is measured in standard deviations from a base indicator. If a mutual fund is less volatile than the comparable indicator, such as the S&P 500, it is said to be a safer investment.

Mutual Fund vs. Mortgage Fund

Not all mutual funds are involved in purchasing mortgages. In fact, very few mutual funds engage in this option. However, some mutual funds are involved in riskier investments than others. If you know you are an owner of a risky mutual fund, you may ask your fund manager if mortgage securities are part of the total investments offered. A mortgage fund specifically purchases mortgage loan securities. These funds were popular in the late part of the 1990's and early 2000's. When the mortgage market collapsed in the ensuing years, however, fewer of these funds were available, if any.

Investing in Mortgages and Loans

If you want to invest in mortgages, you should know you are engaging in a high risk investment. Most mortgages are uncertain, even if the borrower has good credit. You can elect to invest in mortgages if you understand this risk. You will have to find a brokerage willing to trade in mortgage-backed securities, which are much more regulated at this time than they were previously. Alternatively, you can seek to buy toxic debts from banks. This means you will buy mortgages in foreclosure to attempt to recover or profit from the bad loans. This is not through a mutual fund.

Problems Rating Mortgage Funds

Ratings institutions did attempt to rate mortgage backed securities. Unfortunately, the terms they used to rate the securities were offered by institutions falsely reporting the value of the loans. As a result, the ratings were also inaccurate. Many ratings institutions were criticized for these problems after the financial meltdown. Following that situation, the federal government attempted to limit the number of times a mortgage could be split or sold. This is meant to help make ratings more accurate in the future.

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