Explanation

Correct Answer: C - purchase a mortgage-backed security.

Let's analyze each option:

A. originate a residential mortgage.

• This represents a direct debt investment in real estate. The investor would be directly lending money to a homeowner and holding the mortgage as an asset.
• This is not an indirect investment.

B. purchase a commercial property.

• This represents a direct equity investment in real estate. The investor would own the physical property directly.
• This is not a debt investment, nor is it indirect.

C. purchase a mortgage-backed security.

• This represents an indirect debt investment in real estate. Mortgage-backed securities (MBS) are financial instruments that pool together mortgages and sell shares to investors.
• The investor is not directly lending to property owners but is investing in a security backed by real estate debt.
• This is indirect because the investor doesn't originate or service the mortgages directly.
• This is a debt investment because MBS represent claims on the cash flows from mortgage payments.

Key Concepts:

1. Direct vs. Indirect Real Estate Investments:

   • Direct: Owning physical property or originating mortgages directly
   • Indirect: Investing through securities like REITs, MBS, or real estate funds

2. Debt vs. Equity Real Estate Investments:

   • Debt: Lending money secured by real estate (mortgages, MBS)
   • Equity: Owning property or shares in property-owning entities

Mortgage-backed securities are the classic example of indirect debt investments in real estate, allowing investors to gain exposure to real estate debt markets without directly originating or servicing loans.