09/04/2007

Back to Normal?

Hello:

After the announcement last week by President Bush, it would be tempting to say that everything was getting back to normal in the world of real estate and sub-prime mortgages. On Friday, President Bush announced measures intended to give relief to families struggling to pay their mortgages or facing foreclosure. The President acknowledged problems in the subprime mortgage industry and criticized widespread use of adjustable rate mortgages. The president also pledged help from the Federal Housing Administration for low- and middle-income homeowners.

But what about Collateralized Debt Obligations (CDO's)? First issued in the late 1980s, CDO's emerged a decade later as the fastest growing sector of the asset-backed securities market. This growth reflects the increasing appeal of CDO's for a growing number of asset managers and investors. According to the Securities Industry and Financial Markets Association, aggregate global CDO issuance totaled $489 billion in 2006.

CDO's take mortgages, bank loans, and other fixed income securities and run them through a Veg-O-Matic of legal paperwork in order to create traunches (groupings) of investments with similar maturities and ratings. However, according to the Institutional Risk Analyst, the "bottom line is that whether you're talking about CDO's or traditional Mortgage Backed Securities (MBS), private underwriters frequently fail to record a change in the collateral lean on real estate or other assets when a loan is sold or repackaged, largely because hiring lawyers to perform such ministerial but crucial tasks cuts down on deal profits."

In other words, even the people who should know, don't know what is in a CDO. So much so, that the media has related stories of foreclosures being halted because it was unclear who now owned the mortgage.

We conclude that President Bush's remarks indicate that the government is here to help. However, we do not believe that things back to normal yet in the mortgage market.

Time to update or create your organization's written investment policy statement? Contact us for a professional review of your organization's documents.

Terri G. Millson, CIMA, CIMC President

Ray Dicius, CSA, GEPC LPL Branch Manager