The main risks associated with mortgage trusts are credit and interest rate risks. Credit refers to the borrowers’ ability to pay and can change with borrower circumstances. Fluctuating interest rates can affect how borrowers repay or refinance their loan. Trusts that carry mortgages with shorter terms are less affected by interest rate risk.
The yield of a mortgage trust also depends in part on the trust manager finding quality mortgages that meet the trust’s investment criteria. An experienced lender with an excellent track record, and established relationships with brokers and developers, would be in a better position to originate these mortgages than a less experienced lender.
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Finally, investments in mortgages are affected by general economic conditions, local real estate markets, demand for leased space, and fluctuations in occupancy rates, and operating expenses. By their nature, mortgages are relatively illiquid investments. However a trust that invests in short-term mortgages gives the trust managers more flexibility to adjust the trust’s mortgage portfolio in response to market conditions.