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29
Mar 10
Mon

NPR invests in a mortgage bond

In January this year, NPR’s Planet Money bought a portion of a mortgage bond for $1,000.  It’s one of those toxic assets, and defaults have decimated the value of the bond since it was issued. NPR have got an infographic showing the returns on their investment, together with the status of the 2,000 or so underlying mortgages which comprise the CMO to which the bond belongs. They’ve even quaintly given their investment a name, Toxie.

If you listen to the podcast, they talk about the process of finding the bond (which took a couple days) and making the trade and how people do research on securitized assets today. Pretty interesting.

They also mention the prospectus for one of the mortgage bonds they look at, which was over 600 pages. (They find a dealbreaker on page 136: “In the event of insolvency of Lehman Brothers, payments due under the interest rate … agreement may be delayed, reduced, or eliminated.”) Ok, so I can understand why no one actually read those things (except perhaps for Mike Burry) but I really pity the lawyer who had to write the damn thing. Incidentally, I had a brief stint working as a securitization lawyer. One of the matters I was on required me to trawl through pages and pages of documentation for several CDOs. I can’t remember what the goal was – I think the client was trying to spin off the good parts of existing securities into new ones or something – but the documents were horribly drafted. They are difficult to read through at the best of times, but when the drafting is crap, the documents become excruciating. It was actually a really interesting area of work and I enjoyed learning about the concepts, but the devil was in the details.

A bit more poking around shows that the whole bond was initially valued at about $2.7 million.  It recently traded at $36,000 (that’s a loss of almost 99%… ouch). It was issued by some entity called the Harborview Mortgage Loan Trust and the particular bond was apparently initially rated A- (which Moody’s regards as an investment grade security with “low credit risk”).

NPR will make their money back through interest payments if their bond isn’t wiped out within the year by mounting mortgagor defaults (if I understand things correctly, they won’t get their principal back at all – at the tier their bond is at, the principal is already gone). It’s basically a timebomb.

Good idea, NPR. I’m surprised that no journo did this last year!

  11:40pm  •  Business & Finance  •   •  Tweet This  •  Add a comment