INVESTING IN MORTGAGE BONDS
There are now a number of companies formed to purchase first mortgages on new buildings, apartments, etc., and resell them to the small investor for a series of payments. They specialize on first mortgage bonds. It is a good method, but be sure of your company. In order to define a first mortgage bond it is necessary first to explain what a first mortgage is.
A mortgage is a legal paper covering a pledge of real-estate holdings given by a borrower of money to a lender. The mortgage is held either by the lender of the money or by a third party, known as the trustee. Any mortgage represents the promise to pay a stated amount at a specified time, at a legal rate of interest, and it transfers title to the mortgaged property only in case the money for which the security is given is not repaid. A first mortgage, therefore, is any mortgage filed of record which precedes all other claims in the event the property has to be sold to pay the holders of the mortgage or other creditors.
As has been stated above, every first mortgage bond is a direct first lien on the property securing the issue. The importance of this fundamental factor in investment safety would seem to be self-evident, but it is a fact that the investment market is flooded today with a vast number of securities, many of them regarded as conservative, which do not even represent a legal obligation to pay, and which are entirely dependent upon the prosperity of the issuing corporation for their payment. The term “bond” is often a misnomer, the so-called bond being merely a chance to share in profits, if there are any. It is no different from a stock; they are debenture bonds, not secured bonds. They should be very carefully scrutinized.