Mortgage Bonds and The Importance of Class

Class in this discussion refers to both the asset and the market makers.

In 1988, I received my first orientation to Government National Mortgage Association(Ginnie Mae) and Federal National Mortgage Association (Fannie Mae). Emphasis was placed on the safety of investments issued by these agencies. I understood the distinction between the two institutions, meaning, GNMA was an agency of the U.S. Government and FNMA was sanctioned by the government and nothing more.

Several weeks of training followed, allowing me the time to understand the importance of a new era in the bond market. Mortage-backed securities, referred to as MBSs, were designed to provide 50 to 100 basis points more than U.S. Treasuries with similar maturities while enjoying the status of a AAA rating. These investments made a lot of sense when they were first introduced to the market. Investing in a security tied to the ownership of a single-family dwelling was probably one of the best ideas since the IRA was introduced in the '70s.

Soon after I learned how the mortgage market worked, the Colleralized Mortgage Obligation (CMO) was born. This concept became the answer to the wide-spread dissatisfaction over the return of principal from standard mortgage bonds. Investors preferred to have their principal earning interest for as long as possible during the life of the bond. No problem.

I joined the charge in touting the superior performance of CMOs, including the liquidity of the iinvestment. My clients learned enough about this opportunity to earn from 7% to 8% on their money during the unforgettable period between 1991 and 1998 without losing one dime of principal! How could they lose in an environment of falling interest rates? It was a wellspring of capital appreciation.

Deja Vu All Over Again!

It is mind boggling to think both Congress and Wall Street have each contributed to a dilemma that would destroy our economy. There was never a way to avoid a financial crisis if curbs were not placed on the kinds of mortgages that could be underwritten and sold to the bond market. Similar to the infamous junk bond market that reaked havoc in the late 1980's, the mortgage industry which presented a golden opportunity to investors during for almost two decades only to take back its rewards in a devastating scenario.

One can become enraged when studying the reasons this crisis has occurred. Greed, among other things allowed a few individuals, both in politics and in business, to capitalize on the rise and fall of the mortgage bond market. I won't spend the energy to cite cases and individuals here, but reader can certainly learn from recent reports on the character of the financial world.

Two respected sources of detailed information about our economic status are Bloomberg and Forbes. Rather than take the easy route and accept the confusion from so-called economic pundits on television, you might want to search for the answers to your personal financial security, independently. After all, you are probably just as smart as anyone you see in a pin-striped suit.

God bless us all!

Hudster