How Resilient are Mortgage Backed Securities to Collateralized Debt Obligation Market Disruptions?

37 Pages Posted: 7 Nov 2007  

Joseph R. Mason

Louisiana State University - Ourso School of Business; University of Pennsylvania - Wharton Financial Institutions Center

Joshua Rosner

Graham Fisher & Co.

Date Written: February 13, 2007

Abstract

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.

Keywords: subprime mortgage, cllateralized debt obligations, structued finance, economic performance, recession

JEL Classification: G18, G21, G28, E53, E58

Suggested Citation

Mason, Joseph R. and Rosner, Joshua, How Resilient are Mortgage Backed Securities to Collateralized Debt Obligation Market Disruptions? (February 13, 2007). Available at SSRN: https://ssrn.com/abstract=1027472 or http://dx.doi.org/10.2139/ssrn.1027472

Joseph R. Mason (Contact Author)

Louisiana State University - Ourso School of Business

2900 Business Education Complex
Baton Rouge, LA 70803
United States
202-683-8909 (Phone)

University of Pennsylvania - Wharton Financial Institutions Center ( email )

3641 Locust Walk
Philadelphia, PA 19104-6218
United States

Joshua Rosner

Graham Fisher & Co. ( email )

New York, NY
United States
917 379-0641 (Phone)

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