How to Avoid a Falling Knife in the Mortgage Market
CNBC Squawk Box - June 21, 2007
Joe Kernan (Host) with guest Janet Tavakoli

Janet Tavakoli stated when the rating agencies say they don’t do due diligence: “Believe them.” Blaming the rating agencies for problems with CDOs takes the spotlight off the real problem: the collateral. In the mortgage market, the problems are due to lax underwriting standards and risky mortgage loan products. Mortgage bankers, investment banks, who lent money to undercapitalized mortgage bankers and sophisticated investors should bear the losses of problems in the mortgage market.

Tavakoli also calls the ratings agencies to task, dubbing their recent statements to the public “borderline irresponsible.” She says telling investors higher rated securities will not likely suffer loss of principal only gives them half the story. The consulting firm president points out that investors in all tranches could suffer mark-to-market losses as defaults rise, even if the pools backing their own bonds don’t experience rising defaults.

She says now may be a good time to sell ARM MBS if you own them, even if they have high credit ratings, as we’ll soon see resets in subprime, alt-A and prime mortgages alike.

The bottom line? Things may get uglier, especially since falling prices in the MBS market can cause rates for new mortgage loans to rise. That could, in turn, put further downward pressure on U.S. housing prices.


Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct professor of derivatives at the University of Chicago's Graduate School of Business. She is the author of: Credit Derivatives & Synthetic Structures (John Wiley & Sons, 1998, 2001), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, 2008).

Janet Tavakoli's book on the global financial meltdown is Dear Mr. Buffett: What An Investor Learns 1,269 Miles From Wall Street (Wiley 2009)


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