Magazine article American Banker

Collateralized Mortgage Obligations Focus of New Administration Bill

Magazine article American Banker

Collateralized Mortgage Obligations Focus of New Administration Bill

Article excerpt

WASHINGTON -- The administration is in the final stages of preparing a bill that would end the fastest-growing sector of the mortgage-backed securities market.

In draft legislation that creates trusts for investments in mortgages, or TIMs, the Treasury prohibits the use of collateralized mortgage obligations backed by agency securities. These are usually mortgage pass-through obligations of the Government National Mortgage Association, commonly know as ginnie Mae, the Federal National Mortgage Association, or Fannie Mae, and the Federal Home Loan Mortgage Corp, or Freddie Mac.

Similarly, the three agencies would be prohibited from issuing their own CMOs. Freddie Mac, which invented the instrument, last year issued $1.7 billion.

A CMO is a bond issued in two or more maturity classes, backed by a pool of pass-through securities. Compared with traditional pass-throughs, CMOs offer more predictable yields, payback schedules, and maturities, and in the instruments have been popular with investors.

The Treasury draft has been approved by the Office of Management and Budget, and is being circulated to other agencies for comment.

In its analysis circulated with the draft bill, the Treasury stated: "The administration has made a strong commitment to controlling the growth of federal credit, including credit of the three government-related mortgage agencies.

"The special advantages enjoyed by these agencies result in a less efficient allocation of this nation's scarce credit resources," the Treasury said, "and higher overall borrowing costs for all users of credit, including homebuyers. Accordingly, it is crucial to encourage private-sector mortgage-backed securities issuers who do not rely on government backing to enter the market as viable competitors of the agencies."

The draft would also effectively prohibit the use of existing investment trusts and partnerships as vehicles for pooling mortgages and marketing interests in them in a fashion similar to mutual funds. …

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