Mind the Gap

{Q} What about other types] of mortgage-backed securities?

{KIRBY} We find that non-agency loans [loans that don’t conform to government agency underwriting guidelines] made to prime borrowers are trading at spreads dramatically wider than agency-issued securities. We view this as a tremendous investment opportunity in light of what the market has done to valuations on these securities.

{Q} Are there other structured asset classes that are more attractive than home mortgages?

{KIRBY} We believe the commercial mortgage-backed security sector is very attractive now. We’ve seen the same thing happen to true AAA-rated commercial mortgage-backed securities that has happened in high-quality mortgage-backs. In times of stress, investors have been able to sell those securities into the market when they haven’t been able to sell other things.

{Q} What would happen to the home mortgage situation if a federal program was created to help the holders of subprime mortgages?

{KIRBY} I think the market is trying to come to grips with that possibility now. One commonly discussed program—one that would keep rates to borrowers at the same level for a number of years for homeowners who are current on their payments, but can’t handle a reset to a higher rate—is going to help a subset of the market. Our work suggests that this will help the margin, but not necessarily a broad segment of the market. So far, the market has had a muted reaction to all of this. If you change the rules mid-stream, it really complicates things, and I think you may violate some terms of the pooling and servicing contracts, potentially creating legal issues.