Mortgage Cash Flow Obligation - MCFO

See: Mortgage.

You’ve got a few hundred thousand bucks in the bankie-pie and you’re looking to invest the funds. You decide to go into the mortgage business.

You go through all the licensing and legal procedures to become an official mortgage lender in your state. Once all the paperwork is filed and approved, you’re ready to loan cash. You still just have the few hundred thousand bucks to make the mortgage. You’re a legal mortgaging company...just not a very well-capitalized version. But you’ve gone this far, so you decide to push ahead.

You basically have enough for one mortgage. But what if that one mortgage doesn’t pay? If they default, you lose everything.

Even if you think mortgages are good investment, it makes sense to diversify. Instead of directly loaning the money out for a single mortgage, you can invest those funds in a Mortgage Cash Flow Obligation. It lets you participate in a bunch of mortgages at once.

Buy an MCFO and you get access to revenue generated from a pool of mortgages. It’s considered a pass-through investment, with the payments from homeowners passing through to the holders of the associated MCFO. So instead of payments from a single client in your thread-bare mortgage business, your payments are derived from a group of similar mortgages. An individual default doesn’t dry up your entire return.

The MCFO comes with its own downside. You don’t actually have a claim on the underlying property. If you loan money out for individual mortgages, you can respond to any defaults with foreclosure and take possession of the house. You don’t have that recourse with an MCFO.