CFA Practice Question
A mortgage real estate investment trust (REIT) offers the investor safety because:
A. All investment properties in a REIT portfolio have an underlying collateral agreement in the form of a mortgage.
B. The portfolio contains only mortgages and loans, which are relatively safe.
C. The trust has obtained mortgage financing from large, reputable financial institutions for use in purchasing investment properties.
Explanation: Mortgage REIT do not invest in real estate directly. They make real estate loans. Choice a. above is incorrect because it implies that the mortgage REIT holds properties. This is not true. Mortgage REITs hold mortgages secured by properties. Mortgage REITs offer investors relative safety because they invest only in mortgages and loans which are relatively safe.
User Contributed Comments 14
| User | Comment |
|---|---|
| lilbut | ?? what about prepayment risk in the mortgages? |
| dbadidas8 | I guess they are just relatively safe compared to real estate. Nothing is absolutely safe in these days. |
| Rotigga | Mortgages and loans are definitely NOT safe. Look at the whole sub-prime mess today. Even Fannie and Freddie are in trouble, and their underwriting standards are the envy of the entire industry. |
| eb2568 | ...yeah...mortgages are REAL safe these days! |
| StanleyMo | subprime? lol |
| pochuevalex | But in the LOS definition of REIP it is supposed that it can hold properties as well as mortgages! A REIT is a type of closed-end investment company that sells shares to investors and invests the proceeds in various types of REAL ESTATE and real estate mortgages. So A is also correct |
| MUTE | Mortgage REIT do not invest in real estate directly. A REIT does. This question is about Mortgage REITs. |
| Mikehuynh | I overlooked the word "mortgage". Therefore, picked C |
| viruss | This is bullshit actually ... mortage are safe ? Yeah OK well could you please tell this to the EU with Spain current focus & USA subprime gift ;) |
| jnptrsn1 | Viruss, welcome to CFA land |
| ankurwa10 | why not C? |
| ankurwa10 | how does one delete one's comment :P midnight here. studying for the whole day can have such effects. Apologies :) |
| abeeman924 | "Subprime mortgages are safe" - everyone at Lehman pre-2007-08 |
| xemex131 | how does a. imply that the mortgage REIT holds properties.. |