Market Discontinuity Offers Opportunities
By Dr. Tom Parliment
You folks all know my mantra: Attack! Attack! Attack! And when the good guy is lying on the floor, kick ‘em!
As I am writing this, there is significant discontinuity in loan markets and in securities for which these loans are collateral. This discontinuity can mean opportunity. Most of the time, I will emphasize how retail lending and deposit strategies produce sustainable increase in net income. In fact, Parliment Consulting Services offers one-day think-tank strategic financial planning sessions where we get down to the nitty-gritty of your specific markets and tactics. But occasionally, the market opens unusual opportunities in the securities markets.
Today, there is a significant opportunity in whole loan (i.e., non-agency guaranteed) securities. The Sub-prime debacle and the mass deleveraging that followed have cast a shadow over an entire segment of the market. However, much of the non-agency guaranteed MBS space has not seen a real threat to their cash flows, yet their prices are down. To put it another way, the risks encapsulated in various MBS/CMOs are substantially different depending on their specific collateral, i.e., Prime vs. Alt-A vs. Sub-prime. Much of the Sub-prime sector is performing poorly, but most of Alt-A and Prime is not.
Now, here's my point: you have to grow net income! The risk/reward merits of certain of these whole loan securities are very attractive versus most other alternative securities. In some cases you should consider owning them instead of securities currently in your portfolio. For those of you who have excess capital OR those of you either approaching or at a risk-based capital constraint, you have an opportunity to take advantage of leveraged transactions using SPECIFIC WHOLE LOAN CMOs.
It makes sense to learn about the opportunities. Personally, I’ve been alerted to these opportunities by my good friends Rich Berg and Phil Nussbaum at Performance Trust. If you’re interested in learning more about these market opportunities, give me or Janet Frankl-Lockwood a call at 508-881-7002.
Dr. Tom