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Strategies & Market Trends : Mish's Global Economic Trend Analysis

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To: RealMuLan who wrote (55321)	8/24/2006 9:46:21 PM
From: RealMuLan	of 116555

Home loan securities near record By Saskia Scholtes in New York Updated: 26 minutes ago msnbc.msn.com Investors are pushing prices for securities backed by mortgages and home equity loans to near record levels, in spite of data pointing to a slowdown in the US housing market. The rising prices – and falling yields – for these securities are an example of how the financial markets have been affected by the rising popularity of collateralised debt obligations (CDOs) – investment vehicles that sell bonds which are backed by portfolios of other bonds. Story continues below ? advertisement These portfolios can include various loans but many are backed by consumer debts, of which housing-related loans are the most common. Analysts say that CDO structurers such as asset managers and investment banks are continuing to snap up bonds backed by mortgages and home equity loans, leading to a counter-intuitive rally in an asset class that has been a source of growing public concern. Christopher Flanagan, structured finance analyst at JPMorgan, said: "Support [for residential mortgage-backed securities] is in the form of heavy CDO issuance and a pipeline of future deals that keeps refilling. "We have been consistently surprised at the resilience of structured-finance CDO [issuance], given negative [home equity loan] fundamentals and [home equity loan] spreads at or near all-time tights," he added. CDOs work by pooling payments from the underlying securities and distributing the money to investors who take on different levels of risk. The CDO structurers often play the riskiest role – holding the so-called equity tranche or first-loss position – meaning that their appetite for housing-related securities is particularly significant. Figures released this week on weak new and existing home sales during July underscored the mounting evidence this year of a gloomy outlook for the US housing sector. There also are signs that home-owners are starting to have difficulties making repayments. Rating agency Moody's reported that the quarterly delinquency rate on the riskiest layer of the mortgage market increased by 9 per cent in the first quarter of 2006, the first time that the figure has gone up since 2002. Analysts say that CDO structurers and buyers are taking comfort from the belief that a slowdown in house price appreciation will not lead to a doomsday scenario of widespread house price declines. Karan Chabba, CDO analyst at Bear Stearns, said: "The housing numbers are worrisome to the extent that there could be some losses on the underlying pools [of the CDOs]." Copyright The Financial Times Ltd. All rights reserved.

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