Monday, October 22, 2007

CDO's Shutting Off Cash Payments to Investors

Some housing news from the New York Times that I thought was interesting given that the markets have rallied today:

“For all the pain in the mortgage market, investors who hold bonds backed by risky home loans have continued to receive their monthly interest payments — until now. Collateralized debt obligations — made up of bonds backed by thousands of subprime home loans — are starting to shut off cash payments to investors in lower-rated bonds as credit-rating agencies downgrade the securities they own, according to analysts and industry executives.”

“‘At this point, it’s fair to say that everybody expects this shoe will drop,’ said Mark Adelson, an independent mortgage securities consultant and analyst. ‘It’s a foregone conclusion. But when it happens, there will be a market reaction to it.’”

“Investment banks issued some $486 billion in debt obligations linked to mortgages in 2006 and the first half of 2007. In the last two weeks, leading investment banks have written down about $20 billion, much of it in collateralized debt obligations and mortgage-related securities.”

“Most mortgage securities have not yet had significant losses, which are only recorded when homes are foreclosed and sold. Up to two years can pass between a borrower’s falling behind on payments and an auction.”

“‘As far as the security is concerned, it’s only once the property is effectively sold that a loss is recorded,’ said Nicholas Weill, chief credit officer at Moody’s. ‘The process of foreclosure is a long process. It doesn’t just happen overnight.’”

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