Wall Street Repackaging Mortgages at Risk of Foreclosures
Investment banking corporations have been repackaging securities backed by both good mortgages and mortgages at risk of foreclosures to reduce bad debt levels that have been blocking the recovery of the mortgage market.
Some analysts are commenting that the banks are again doing the very things that contributed to the collapse of the housing and mortgage markets.
But Herbert Kaufman, economics professor at the Arizona State University, said that the strategy could help eliminate huge amounts of mortgages in banking portfolios that are preventing them from making new loans to homebuyers and businesses.
Kaufman admitted that the packaging of commercial and residential loans into securities during the housing boom prompted the provision of residential loans to ineligible borrowers and the provision of commercial loans to purchase overpriced buildings.
But now the repackaging is done in ways different from what was done during the boom. Besides investors now know what they are getting into and what happens if their investments fail.
Now mortgages are packaged in combinations of excellent mortgages and not-quite-excellent mortgages so that the bonds could get AAA ratings. The bond deals are also sweetened with the guarantee that safe investors will get paid first before the risk-taking investors.
The riskiest mortgages are packaged in securities that are sold cheaply to investors who are willing to take high levels of risk but a chance of huge returns.
This strategy of packaging mortgages according to their risk levels enables investment banks to lessen their losses and increase their chances of strong returns.
Wall Street executives like Sue Allon of Allonhill and Brian Bowes of Hexagon Securities explained the repackaging as a great solution to the mortgage problem blocking the recovery of the lending market. They are now calling the strategy as resecuritization of real property mortgage investment conduits.
However, there are still high levels of risks involved, according to several financial analysts. One is the uncertainty related to the direction of the housing market. Some say the market has bottomed out; others say more residential and commercial foreclosures are still to come and push down prices further down.
Another is the role of rating agencies, which failed to determine the risk of securities backed by subprime mortgages during the boom. The uncertainty about the real value of the mortgages comprising the mortgage-backed securities is also a huge risk, according to Gabe Poggi of FBR Capital Markets.
Nonetheless, Wall Street financial executives are hopeful that this time they got it right.
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