Traders and Researchers Roundtable

Abstract

This session explores the drivers of mortgage-backed securities valuation—technical and fundamental. The price action in this market has been very negative over the past six months. In particular, prices on securities backed by sloppier collateral (option ARMs and subprime) have declined the most. This price action reflects a number of technical factors including fears of European selling and dealers cutting back positions, a general decrease in risk appetite, and wide bid–ask spreads. Most participants think the housing market has further, although limited, downside. One participant believes that policy markets need to implement two measures to help stabilize home prices: a more successful modification program and a bulk sales program to attract more institutional investors to the housing market. The panel discussed expectations of collateral performance going forward, considering factors such as improving delinquency roll rates, lower interest rates, and stretched-out liquidation timelines. Trade recommendations varied based on such factors as which securities were most beaten up in price and showed the best prospects for improved performance.