Saturday, July 30, 2011

Technical Market News: Commercial Mortgage Baccked Securities are in Trouble

No Commercial Mortgages, No Real Estate Investing, Bad Economy

Mortgage Backed Securities (MBS’s) are exactly what they sound like.  A group of mortgages are put into a pool, and investors buy bonds issued by the pool.  The appeal of this is that investors can diversify risk, since they own a fraction of each mortgage. Eachpool is given a credit rating, which allows investors to determine the risk of the investment.

Unfortunately things do not always work out as planned.  Sponsors of pools were able to put a lot of “junk” mortgages into these securities, and still get very good credit ratings and when that “junk” tanked, these securities became a large cause of the 2008 financial crisis.

Standard and Poor’s is one firm that took the brunt of the blame.  So on Thursday S&P shocked the financial markets a failure to provide a credit rating at the last minute on a $1.48 billion offering by Goldman Sachs and Citibank.  For most of us, the attitude is doesn’t matter.  

 But Commercial Mortgage Backed Securities give liquidity to commercial lending, and without this tool the economy is severely compromised.  The collapse of the CBMS as shown below has hampered investment.

 For Wall Street, it is monumental.

"This is a debacle of epic proportions," said Paul Norris, head of structured products at Dwight Asset Management in Burlington, Vt., which oversees $54 billion in assets. "Confidence in S&P had already been a bit shaky over how they approached previous deals. I don't see how a dealer or investor in the near term can trust their ratings."

Really, people who invested in supposedly Triple A Mortgage Backed Securities only to find out they were filled with poor credit quality paper may not trust the rating agencies?  What a surprise.

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