How Resilient are Mortgage Backed Securities to Collateralized Debt Obligation Market Disruptions?
Joseph R. Mason
Louisiana State University - Ourso School of Business; University of Pennsylvania - Wharton Financial Institutions Center
Graham Fisher & Co.
February 13, 2007
The mortgage-backed securities (MBS) market has experienced significant changes over the past couple of years. Non-agency ("private label") securities, which are not guaranteed by the government or the government sponsored enterprises, now account for the majority of MBS issued. In this report, we review the rise of collateralized debt obligations (CDOs), the relaxation of lending standards, and the implementation of loan mitigation practices. We analyze whether these structural changes have created an environment of understated risk to investors of MBS. We also measure the efficacy of ratings agencies when it comes to assessing market risk rather than credit risk. Our findings imply that even investment grade rated CDOs will experience significant losses if home prices depreciate. We conclude by providing several policy implications of our findings.
Number of Pages in PDF File: 37
Keywords: subprime mortgage, cllateralized debt obligations, structued finance, economic performance, recession
JEL Classification: G18, G21, G28, E53, E58working papers series
Date posted: November 7, 2007
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo7 in 0.719 seconds