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A mortgage loan is a loan secured with real property as collateral. The borrower is obliged to pay the loan back with a predetermined set of payments. Mortgage loans can be obtained through banks or other financial institutions. The characteristics of a mortgage loan (size, maturity, interest rate, etc.) can vary. In a residential mortgage, if a home buyer defaults on paying the loan, the bank may foreclose on the home, evict the tenants and sell the house.

The U.S. mortgage market totalled around $3 trillion in 2007 but has since declined following the collapse of the subprime mortgage sector, which accounted for around 20% of the total. Newer mortgage-based trading products have since appeared, offering traders and investors more opportunities in the housing market.

Traders and investors wanting exposure to the U.S. mortgage market have typically faced two choices: mortgage indexes based on either stock or home values; or mortgage-backed securities, usually collateralized bonds. The latter market collapsed spectacularly in 2007,[1] particularly at the $600 billion subprime end, and smacked the global investment banking sector.

Index Plays[edit]

The Chicago Mercantile Exchange lauched the first investment vehicles for the mortgage market - CME Group real estate products - in 2006. CME listed futures and options contracts based on the value of the widely-quoted S&P/Case-Shiller Index of the U.S. housing market, which follows the house prices of 10 U.S. cities with a two-month lag. The contracts extend from 18 months up to 60 months out, listed quarterly and biannually.[2] CME has since added similar contracts for commercial real estate.

Index-product innovater MacroMarkets recently filed to launch MacroShares Major Metro Housing Up and Down securities based on the S&P/Case-Shiller Index, essentially the first U.S. mortgage-market ETF.[3] Observers praised the new product for helping to open up a previously illiquid section of the asset market and expect the mortgage MacroShares to be used similarly to medium-term and long-term CME housing futures contracts.[4]

Housing stock[edit]

The KBW Mortgage Finance Index (MFX) takes a different track to funds based on the Case-Shiller Index that tracks home prices in cities around the country. Instead, MFX tracks the broad performance on U.S. exchanges of stocks in companies like Fannie Mae and Countrywide that are heavily exposed to the mortgage market. Options contracts on the MFX are listed on the International Securities Exchange (ISE) and the Philadelphia Stock Exchange(PHLX).