Peril for Products Tied to Mortgages
Investors in collateralized mortgage obligations, or C.M.O.’s, were badly burned by increases in interest rates in 1994. Some of the factors are again present. Banks and other investors in the little-known trillion-dollar market could be set for a spill. C.M.O.’s sound and look similar to collateralized debt obligations, the structured products that helped bring the financial market to its knees in 2008. There’s one big difference. C.M.O.’s are built out of mortgage bonds guaranteed by the government-sponsored agencies Fannie Mae, Freddie Mac and Ginnie Mae. Should defaults on the underlying securities mount, these agencies — and ultimately the government — will keep investors whole.