What began several years ago as an esoteric asset class, collateralized bond obligations (CBOs) backed by mortgage-related securities have transformed from a niche product to a significant asset class. Mortgage CBOs are securities collateralized primarily by an actively managed portfolio of residential mortgage-backed securities (MBS), adjustable-rate mortgages (ARMs), and collateralized mortgage obligations (CMOs), with smaller exposures to asset-backed securities (ABS) and commercial mortgage-backed securities (CMBS). Since 1995, Fitch IBCA has rated more than $14 billion of such transactions. Issuance in 1998 and 1999 exceeded $5 billion each year. Structures have varied over the years as dictated by market conditions and investor demand, and Fitch IBCA expects continued innovation. However, the primary focus of the rating analysis - the market value risk of the underlying assets - remains unchanged, since ratings are based primarily on the credit enhancement provided by the market value of the collateral. This report discusses the development of the mortgage CBO and trends that Fitch IBCA believes will lead to further expansion of this market.

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