CFA Institute: Investors Would Buy MBS Minus Guarantees with Better Underwriting Standards

Categories: Americas, Systemic Risk, US Regulatory Reform

Sometime over the next fortnight, the U.S. Senate Banking Committee is expected to release its proposals for mortgage and MBS market reforms. It is an issue that the Dodd-Frank Act ignored in 2010 but one whose systemic implications have been raised by many CFA Institute members. But it is the investment sector whose decisions on whether to buy securities backed by these mortgage loans that ultimately will determine the success or failure of this reform effort.

To determine how interested the investment sector is in MBS, CFA Institute invited members engaged in fixed-income investing to give their views on the market. The investors were asked about whether they currently invest in the market, their likelihood of investing in MBS in the future, the importance of a federal guarantee in their MBS investment decisions, and what would persuade them to invest without a federal guarantee.

The survey, taken in mid-November 2013, found overwhelming willingness (72%) on the part of these fixed-income investors who responded to the survey to buy MBS without the benefit of federal guarantees — so long as they had assurances about the quality of underwriting and transparent data to verify those underwriting standards. Likewise, 71% of survey respondents indicated that higher yields were needed to overcome the risks they believe they are assuming when putting their clients’ funds at risk in these securities. Failing these reforms, a small majority (56%) said federal guarantees were important, even though 81% recognized those guarantees distort the market.

We have been using these survey results in our advocacy efforts in Washington D.C. Specifically, they have given members of Congress and their staffs the views of investors in this market, a perspective that they really need to hear.

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One comment on “CFA Institute: Investors Would Buy MBS Minus Guarantees with Better Underwriting Standards

  1. Orest Monokandilos, CFA said:

    Maybe there should be a neutral agency pricing Credit Default Swaps (CDS) on every MBS with at least one page detailed standardized explanation on the price. Every issuer should provide a standard block of information to support/explain the underwriting on each MBS…

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