CNBC's
Squawk Box
How to Avoid a Falling Knife in the Mortgage Market
Joe
Kernan (Host) with guest Janet Tavakoli - June 21, 2007
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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.
She also feels that the other fellow's assertion
[in
the video] that
the problems with the Bear Stearns' funds concern
was partly due to the rating agencies is fallacious. BSAM's managment
is much more savvy than the rating agencies, and while they may
have been exploiting rating shopping, they knew exactly what they
were doing.
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.
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