The issue at hand is hardly that simple.
Risk by itself, can reduce value substantially.
One Wagner may not come close to overcoming the transfer costs of repossessing and liquidation massive amount of real estate, but real estate is not what is being sold in this case. The packages of mortgages are packages of income, income which is highly suspect of not ever showing up because of the risks of default.
The liquidations of the underlying real estate in these cases might be hard to analyze because the real estate values have fallen. In other words, you might have for example, a $450,000 mortgage on a property which was worth $500,000, but is now worth $350,000. Why would you buy that mortgage? Even if you sold the property you'd still lose.
Now ask yourself what a
package of those types of mortgages might be worth? Any takers? Could you afford re-appraisals of all the properties in the package? Even if the numbers worked, what about the risk of default? How can you analyze how each loan was underwritten after they're repackaged a number of times?
Here's the definition of one type of the securities in question, the CMO:
Collateralized mortgage obligations (CMOs), a type of
mortgage-backed security, are bonds that represent claims to specific cash flows from large pools of home mortgages. The streams of principal and interest payments on the mortgages are distributed to the different classes of CMO interests, known as tranches, according to a complicated deal structure. Each tranche may have different principal balances, coupon rates, prepayment risks, and maturity dates (ranging from a few months to twenty years).
CMOs are often highly sensitive to changes in interest rates and any resulting change in the rate at which homeowners sell their properties, refinance, or otherwise pre-pay their loans. Investors in these securities may not only be subjected to this prepayment risk, but also exposed to significant market and liquidity risks.
Here's another known at the CDO:
Collateralized debt obligations are
securitized interests in pools of"”generally non-mortgage"”assets. Assets"”called
collateral"”usually comprise loans or debt instruments. A CDO may be called a
collateralized loan obligation (CLO) or
collateralized bond obligation (CBO) if it holds only loans or
bonds, respectively. Investors bear the
credit risk of the collateral. Multiple
tranches of
securities are issued by the CDO, offering investors various maturity and credit risk characteristics. Tranches are categorized as
senior,
mezzanine, and
subordinated/
equity, according to their degree of credit risk. If there are defaults or the CDO's collateral otherwise underperforms, scheduled payments to senior tranches take precedence over those of mezzanine tranches, and scheduled payments to mezzanine tranches take precedence over those to subordinated/equity tranches.
Mark to market
