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Sledgehead

Q1: What Is "mortgage Portfolio Acquisition"

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Pretty much what it says on the tin: any of you guys who can tell me :

Q1: what is "Mortgage portfolio acquisition"

Q2: how does it differ from buying CDOs

My general understanding of these issues tells me that MPA involves buying unsecuritised bundles of mortgages, whilst buying CDOs involves buying a bunch of securities whose income is derived from debt interest payments, the principal of which is secured against the asset purchased with the riased debt.

Both would appear to be ways of increasing one's mortgage assest (when the CDOs are collaterised against property and backed by mortgage payments). CDOs would appear to be a more opaque route, possibly with extra leverage.

MPA would also perhaps be something an issuer of CDOs might get involved in, to get the raw material for the CDOs.

Am I anywhere close?

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Pretty much what it says on the tin: any of you guys who can tell me :

Q1: what is "Mortgage portfolio acquisition"

Q2: how does it differ from buying CDOs

My general understanding of these issues tells me that MPA involves buying unsecuritised bundles of mortgages, whilst buying CDOs involves buying a bunch of securities whose income is derived from debt interest payments, the principal of which is secured against the asset purchased with the riased debt.

Both would appear to be ways of increasing one's mortgage assest (when the CDOs are collaterised against property and backed by mortgage payments). CDOs would appear to be a more opaque route, possibly with extra leverage.

MPA would also perhaps be something an issuer of CDOs might get involved in, to get the raw material for the CDOs.

Am I anywhere close?

When you buy mortgages, you own the property if the borrower defaults.

When you buy a CDO of RMBS, you get the recovery rate on the RMBS when the borrowers default determined in a stressed, forced, liquidation environment which may be below fair value between two willing market participants.

I liken the difference to buying the ingredients for a meal vs a ready made meal. Owning the mortgages themselves gives you a lot more control over the outcome upon default compared to a CDO of RMBS which have pre-defined default resolution mechanisms.

Edited by LuckyOne

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When you buy mortgages, you own the property if the borrower defaults.

When you buy a CDO of RMBS, you get the recovery rate on the RMBSwhen the borroers default in a liquidation.

I liken the difference to buying the ingredients for a meal vs a ready made meal. Owning the mortgages themselves gives you a lot more control over the outcome upon default compared to a CDO of RMBS which has pre-defined default resolution mechanisms.

I can see that and it chimes with my own suspicions. Thanks for your input. I'd be fascinated to get your view on this:

"In March 2009, Iain Cornish, chief executive (of Yorkshire Builing Soc) , said: .... we have never been active in the ... mortgage portfolio acquisition markets - parts of the market which appear to be suffering most as the recession begins to bite. " - ThisIsMoney - Yorkshire Building Society: How to measure its strength - 2nd July 2009

whilst previously:

"The subprime credit crisis cost Yorkshire Building Society £50m in 2007 and slashed its pretax profits by 30% to £54.6m. It took a further £15m hit in the month of January, taking the total to £65m.

Yorkshire took the charge against a £135m portfolio of 'structured credit investments' including the now notorious CDOs - collateralised debt obligations." - ThisIsMoney - Yorkshire's subprime losses hit £65m - 25 March 2008

In both cases Cornish was the CEO. To me it seems akin to Harold Shipman saying he never once shouted at his patients. :blink:

Edited by Sledgehead

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I can see that and it chimes with my own suspicions. Thanks for your input. I'd be fascinated to get your view on this:

"In March 2009, Iain Cornish, chief executive (of Yorkshire Builing Soc) , said: .... we have never been active in the ... mortgage portfolio acquisition markets - parts of the market which appear to be suffering most as the recession begins to bite. " - ThisIsMoney - Yorkshire Building Society: How to measure its strength - 2nd July 2009

whilst previously:

"The subprime credit crisis cost Yorkshire Building Society £50m in 2007 and slashed its pretax profits by 30% to £54.6m. It took a further £15m hit in the month of January, taking the total to £65m.

Yorkshire took the charge against a £135m portfolio of 'structured credit investments' including the now notorious CDOs - collateralised debt obligations." - ThisIsMoney - Yorkshire's subprime losses hit £65m - 25 March 2008

In both cases Cornish was the CEO. To me it seems akin to Harold Shipman saying he never once shouted at his patients. :blink:

CDOs / SIVs were way too expensive when the YBS bought them and they got burned.

While I still think that default rates will rise and recovery rates will fall in the next few years, I think that mortages in the secondary market might now be priced fairly (or even slightly cheap).

All credit to the YBS if they made a mistake once and have learned their lesson and are now buying assets at a fair price on a risk adjusted basis. If they have made a conscious distinction between the default settlement mechanisms of the two different assets, they may actually be on the right track.

As I have had drummed into my head for years, there is always a "right" price for every risk. Much of the time, risks seem to trade at the "wrong" price. The YBS might have actually found something trading at the "right" price.

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CDOs / SIVs were way too expensive when the YBS bought them and they got burned.

While I still think that default rates will rise and recovery rates will fall in the next few years, I think that mortages in the secondary market might now be priced fairly (or even slightly cheap).

All credit to the YBS if they made a mistake once and have learned their lesson and are now buying assets at a fair price on a risk adjusted basis. If they have made a conscious distinction between the default settlement mechanisms of the two different assets, they may actually be on the right track.

As I have had drummed into my head for years, there is always a "right" price for every risk. Much of the time, risks seem to trade at the "wrong" price. The YBS might have actually found something trading at the "right" price.

I hear what you say but what I was drawing attention to was the way he says he was never involved in MPA, when in actuality he was involved in something much more dodgy and opaque. Don't these bell-ends see the hypocrisy in their sanctimonious protestations, or do they merely belive, by using industry jargon, we'll nod passively and sign off on yet another bonus?

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I hear what you say but what I was drawing attention to was the way he says he was never involved in MPA, when in actuality he was involved in something much more dodgy and opaque. Don't these bell-ends see the hypocrisy in their sanctimonious protestations, or do they merely belive, by using industry jargon, we'll nod passively and sign off on yet another bonus?

I might be being too kind but I see things as follows :

If I ran a bank at the moment and had the choice between granting 5 year 6% mortgages in the primary market because of government interference or buying 5 year 8% mortgages in the secondary market because of a lack of liquidity and market stress, I know the choice that my fiduciary responsibility to my members or shareholders (not sure about the YBS corporate structure) would force on me.

It has been my long held belief that assets and liabilities are priced much more fairly in secondary markets than primary markets.

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