Mr. Pink's Picks: selected event-driven value investments Message Board

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Strategies & Market Trends : Mr. Pink's Picks: selected event-driven value investments

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To: Gary105 who wrote (3294)	9/27/1998 2:13:00 AM
From: Larry Abrams	Read Replies (1) of 18998

<<also shouldn't the pending drop in interest rates work in their favor in securitizing their loan portfolio (lend at high interest rate, borrow at low one)??>> The way to view financial institutions involved in securitization is not "lend at a high rate and borrow at a lower one (like a traditional S&L or banks) But buy at a low price and sell at a higher price. They buy mortgages at a lower price (as represented by the present value (discounted cash flow) and sell asset-backed securities at a higher price What has happened in the last year has been an UNEVEN drop in interest rates. A flight to quality. As interest rates fall, the PRICE of financial assets rise. An uneveness in the fall of interest rates is mirrored by an uneveness in the PRICE rise of financial assets. From the latest Business Week: 10 Year Treasury Notes: dropped in a year from 6.39 to 5.22 Long term BBB Industrials: dropped in a year from 7.27 to 6.91 Thus, the PRICE of a mortgage (buy) has been rising faster than the PRICE of asset-backed securities (sell). And the gain on sale has dramatically dropped. And if insitutions aren't quick to turn a sale, they may even have a loss on sale The uneveness in interest rate drops has been the major cause of the fall in stock prices of specialty finance companies. This is also a reason that the mere lowering of the discount rate by the FED won't turn around the securitization market. As long as there is a flight to quality, the securitization market is in trouble.

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