Value in Mortgage Securities?
WSJ. Online reports: I read recently that Pacific Investment Management Co., the big bond-oriented money-management firm, has launched a distressed-mortgage fund. A Pimco spokesman said this is a "private fund" unavailable to the likes of individual investors like me, but if not, I'd be in line to invest.
This may seem foolhardy, given the recent subprime-induced credit-market turmoil and the Federal Reserve's decision to cut the federal-funds rate, suggesting that the broad economy has indeed been harmed. August foreclosures jumped 36% from July, suggesting things are continuing to get worse.
Still, I have the distinct impression that when it comes to mortgage-backed securities, in many cases the baby has been thrown out with the bath water. Some triple-A-rated securities went overnight from being gilt-edged to something impossible to value because there was no market. True, there were plenty of excesses in lending practices, many only now coming to light. Bond-rating agencies may have been overgenerous with their triple-A designations. But that doesn't mean all mortgages or all mortgage-backed securities are worthless.
I was raised to believe that homeownership is a linchpin of the American dream and that the mortgage payment that makes it possible is an almost sacred obligation. I'd give up just about anything else to make that payment. I know plenty of people who feel the same way.
This isn't a notion that's been showing up in recent stories about people failing to make their mortgage payments and facing foreclosure. I'm convinced that most of these people are trying desperately to make their payments and stay in their homes.
Mortgage defaults aren't the equivalent of the savings-and-loan mess. During work on my book "Blood Sport," about the Whitewater affair, former Clinton backer and Arkansas S&L operator Jim McDougal (now deceased) told me how he'd squandered millions on Campobello, a resort in chilly New Brunswick, Canada, primarily because his hero, F.D.R., had vacationed there in the days before air travel made warm, sunny climes accessible to almost everyone. The development made little or no economic sense, and no federal bailout would ever recoup the losses. By contrast, most residences have value, even if they have recently been sold at inflated prices. Over time they will appreciate. And the vast majority of borrowers will make their payments.
Apart from Pimco, I know of several funds that are buying distressed mortgages. This takes extensive research and is labor-intensive but seems far more efficient than a congressional bailout. The approach seems likely to help ease the crisis, help struggling borrowers, and reward investors. Unfortunately, I haven't heard of any of these funds that are open to individual investors.
Amidst all the talk of congressional bailouts and interest-rate cuts, let's not forget the millions of homeowners who are dutifully making their mortgage payments even if it means giving up an evening out or a vacation. These are the hard-working, responsible people who make the American economy the greatest in the world, and I'd buy securities backed by their mortgages any day.
Full story: online.wsj.com
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