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Generic securities are mortgage-backed securities that make use of loans or mortgages that have been issued within the last calendar year. Typically, a generic security is slightly lower in value than a seasoned security, which is a mortgage-backed security that utilizes loans or mortgages that have been in existence for more than one calendar year. While the value of these types of securities is lower than the older investment options, generic securities are also priced lower and may be attractive to a number of investors.
One of the main reasons that a generic security is issued at a lower rate is that the underlying mortgages or loans backing the security have not been in existence long enough to be considered stable. This is because the incidence of default on these types of debt obligations is traditionally understood to be higher during the first twelve months after issuance. Once payments on the debts have remained current during that first year, the confidence in the stability of those loans and mortgages increases. This in turn affects the value of the generic security, allowing it to be considered stable or seasoned.
While the value of a generic security is lower than other mortgage-backed options, the purchase price is also somewhat lower. This helps to offset some of the risk that investors assume by purchasing a security where the underlying assets have not proven to be stable. Investors who believe that the underlying assets connected with the security will survive that first year and that the return is worth the risk assumed will often find that investments of this type can be profitable.
As with any type of investment activity, investors should look closely at the nature of the debt obligations that provide the support for any generic security. Taking the time to understand the nature of those loans and mortgages and get an idea for the potential those debts carry to be settled in a timely manner will make it easier to focus attention on investments that are more likely to earn a return. At the same time, this type of activity will also increase the chances of identifying a generic security that is backed with loans and mortgages carrying a higher degree of risk than the investor finds comfortable. Assuming the investor is correct in his or her estimation of the stability of those underlying debt obligations, the effort to carefully evaluate the viability of the investment can prevent losses while also allowing the investor to move on to an option that shows more promise.
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