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CMO

Discussion in 'Money & Finance Forum' started by Angie, Sep 25, 2006.

  1. Angie

    Angie Full Access Member

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    Freak,

    If you were invested in a company that owned a substantial portfolio in these..though highly diversified with other investment assets, would you be alarmed by
    rising interest rates..I know the long bond yield is decreasing and this reduces mortgage rates, so if most of the loans comprising the CMOs are ARMS wouldn't that be cause for concern?
     
    Last edited: Sep 25, 2006
  2. Freakshow

    Freakshow Fuck you guys.

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    You'd really need to know MORE about the portfolio of CMO's. Since rates have been VERY low for several years...and are now quite a bit higher (even with the pullback in rates)...when were these bought?

    Lot of people out there have ARMs in the 4's. If you decide to refinance today, you are still in the low 6's (now we are entering the high 5's).

    The VALUE of the portfolio should be going up...but how MUCH of that portfolio will be refi'd?

    With the limited info...I would NOT be concerned.
     
  3. VA49er

    VA49er Full Access Member

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    Freak's right. Prepayment risk is the biggest risk with regards to CMO's, or any Mortgage Backed Security for that matter. The portfolio manager should be monitoring the prepayment speeds of individual CMO's on a daily basis. If rates increase, the CMOs shouldn't prepay but if rates decrease, then people will refinance their mortgages which will then speed up the prepayment with the CMO and reduce its value.
     
  4. Angie

    Angie Full Access Member

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    My understanding of CMOs are that the prepayment risk is much less than other mortgage backed securities, and they carry a lower interest rate for that reason. My thinking is that if individuals loans are refinanced..they get paid off and that's a good thing..the principal can be reinvested....my concern would if the economy continues to trend downward and unemployment began to rise signficantly..then significant loan defaults might follow.
    I think the downward trend in crude will have a positive impact on corporate earnings, but this trend is temporary..in my opinion..and crude will spike up again with the next hurricane of next mid east crises..which is sure to happen.


    I'm hearing on CNBC there is great demand for these types of securities...just trying to get a better understanding. Thanks.
     
  5. Angie

    Angie Full Access Member

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    Just heard from Realty Trac on CNBC-foreclosures are up 50% 8/06 compared to 7/06. Leading states were FL, NV and CO.
     
  6. Freakshow

    Freakshow Fuck you guys.

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    Yeah...foreclosures are getting pretty bad. Question...what TYPE of loans are being foreclosed on?

    Pay Option Arm??? No surprise there...

    2/28 ARM??? Ding. We have a winner. These loans are for the "credit challenged." What happens...people buy a home they should NOT buy due to credit or lack of funds...but still want to do it. They do 100% financing and get a rate in the high 9's to low 10's.

    The whole goal is to establish a good mortgage history and improve credit. Then refi into a conforming loan in a year. NEVER happens...

    They can't make the payment...mortgage lates CRUSH the credit...now they can't get out of the 2/28 ARM...it SOARS...and the home is foreclosed on.

    This problem is going to get REAL bad in the next 12 months...
     
  7. Savio

    Savio Freelance Pimp

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    buy and hold SLHD
     
  8. Angie

    Angie Full Access Member

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    typed wrong symbol ?
     
  9. VA49er

    VA49er Full Access Member

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    I wouldn't say "much less". There are different types of CMO's. Some are agency backed and thus have less risk than a private label CMO. With CMO's the cash flows are directed in a prioritzed order, called tranches, based on the structure of the bond. These tranches also decrease the liquidity of the CMO. Be sure to check the ratings. Hopefully all will be AAA.

    Not necessarily. What’s good for the home buyer is not necessarily good for the CMO investor. If interest rates fall and prepayment speeds accelerate, CMO investors may find they get their principal back sooner than expected and have to reinvest it at lower interest rates (“call risk”). If interest rates rise and prepayment speeds are slower, investors may find their principal committed for a longer period of time, causing them to miss the opportunity to earn a higher rate of interest (“extension risk”).

    No doubt the next hurricane to approach the gulf will cause a spike in oil prices, however, the oversupply left over from this summer will eventually taper off and we'll probably see gas prices actually rise a little next month.
     
  10. Angie

    Angie Full Access Member

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    I would never personally invest in a CMO, but my favorite stock has a division that holds a signficant portfolio..but as I said it doesn't focus on them entirely..it has other divisons that take equity position type loans in all kinds of sectors.

    I just don't understand why its stock keeps climbing..I keep waiting for it to go down so I can buy it back..but looks like its not going to ...I am trying to figure out if the CMO portfolio has anything to do with that since there seems to be a demand for CMOs..according to CNBC..and I just don't understand why that would be so.

    Thanks for your input.
     
    Last edited: Sep 25, 2006

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