Mortgage Derivatives Show Signs of Life
NEW YORK -- The worst may be over for the mortgage-derivative market. After a savage price decline, there are signs of a bottom in the high-risk market for exotic bonds backed by home mortgages.</br></br>"There's not much that can go wrong now," says Greg Parseghian, a Salomon Brothers bond analyst. He is cautiously optimistic because rising interest rates already have wreaked so much havoc on this mercurial market.</br></br>Frequented by investors big and small, from banks and insurers to certain mutual funds, the mortgage-backed securities market is a realm where lots of bonds now sell below par (their face amount). Especially distressed are segments of the market for collateralized mortgage obligations. CMOs are bonds carved from pools of home mortgages into an array of bonds of varying maturity, coupon and risk.</br></br>Many of these bonds, created when rates were lower and homeowners began prepaid mortgages at a furious pace, now languish as much as 75% below their high point last year. But by and large, analysts say, the surprise losses -- and the forced selling -- are over.</br></br>"This market is going through the same thing that junk bonds did in 1990," says Edward Sporl, a Greenbrae, Calif., money manager who views the price decline as a buying opportunity. The parallels do seem compelling: Then, as now, underwritings of new bond issues sputtered, forced selling drove down prices, and trading was sporadic.