Among the many types of mortgage-related securities markets being reshaped by some skepticism in the wake of the recent downturn is the collateralized mortgage obligation market.

Among uses of CMOs are to hedge interest rate risk-never an easy task-particularly last Thursday given the shock to the market that some lenders said caused rates to fall as much as 50 basis points. So investors may both be looking closely at them and their risks in today's market and that is why those in the CMO business are taking a cautious approach.

Ray Gilliam and Allen Paksima, whose firm called Prime Institutional Group works with primary dealers to structure CMOs, recently gave a hint of how the CMO business of today is shaping up in a recent Webcast sponsored by A.M. Best.

As Paksima noted during the Webcast, MBS are the building blocks for CMOs that-very roughly and simply put-allow pools to be divided into tranches with varying maturity ranges.

Since MBS passthroughs are CMO building blocks and there have been virtually no private-label passthroughs, as one might expect, there also have been no private-label CMOs "of any volume" in the market. "It's government paper all the way through that we deal with," said Gilliam. "We're very sensitive to principal risk."

That being said, Paksima was careful to say that he and Gilliam "aren't money managers" and they "don't assume fiduciary responsibilities" in implementing their strategies.

Gilliam said the two are not registered investment advisors because the move would cause them to lose the relationship with primaries that gives them their competitive edge.

As far as "suitability," and their level of risk Gilliam said that today from his perspective CMOs are really for institutional investors and not for retail investors. Insurance companies are among those they could be suitable for, Paksima said.

Gilliam stressed that the company starts slowly when working with investors "because it's an education process."

As continuing low rates seen through press time show, even prior to last week's market plunge, the market has had an appetite for government/agency mortgage-related securities even without the Fed.

"Investors have stepped in," Freddie Mac chief economist Frank Nothaft told this publication last week. He said these have included banking institutions, private equity and hedge funds as well as some pension funds.

Nothaft has forecast average 30-year rates roughly in a range of 5% to 5.5%, give or take 10 basis points. He noted that some studies show the Fed has had less influence on rates than previously thought.

But rates can change minute-by-minute hour-by-hour, Nothaft noted, not long before the market showed that to be all too true last Thursday, coming close to a new prepayment trigger.

Even before the market plunge last Thursday rates continued to be, on a net basis, low last week.

According to Freddie Mac's primary market survey the average 30-year mortgage rate dropped back to 5% from 5.06% where it was the week previous. Shorter-term rates also fell week-to-week.

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