On the Maximization of End-of-Loan Homeowner Wealth Using a Hybrid Security

Abstract

The performance of a hybrid mortgage instrument is examined, which is structured as a managed fund with a 5-and-20 rule: viz. the management entity earning a 5% fee based on portfolio value and a 20% fee on all returns in excess of 8%. It is demonstrated that the hybrid security is able to outperform a conventional mortgage over 80% of the time and return to the homeowner a total portfolio value in excess of 85% of the initial loan value, allowing for a substantial increase in mortgage-based cash flows for the lender and sizeable retirement savings for the borrower.