No. of Recommendations: 4
http://www.nytimes.com/2007/03/11/business/11mortgage.html?hp

Nothing I didn't know, but I love it when they out some scum stock analyst.
Print the post Back To Top
No. of Recommendations: 0

Lokicious,

Reading this article made me look at some of my own investments such
as DODBX which has Fanimae and Fredimac in the bond portion of the
fund. How concerned should one be since they are privately held with
a Congressional charter?

Pappy
Print the post Back To Top
No. of Recommendations: 0

Plus what about FGMXX Fidelity's Government money market fund
which at this time contains the bulk of my portfolio. I suppose
there is no one safe place to hide within a 401k since it is packed
with the same type of investments.

Pappy
Print the post Back To Top
No. of Recommendations: 1
Reading this article made me look at some of my own investments such
as DODBX which has Fanimae and Fredimac in the bond portion of the
fund. How concerned should one be since they are privately held with
a Congressional charter?


The problem is we don't really know, and it would be very difficult to analyze the holdings of particular funds to figure out how exposed they are to sub-prime mortgage bonds. I think the biggest problem is not with Fannie and Freddy, although they certainly have been repackaging sub-prime mortgages. Commecially-backed mortgage bonds are even more exposed, so you should look at what those holdings are for your fund if you are concerned. The big problem, though, is for funds and pension plans (not to mention hedge funds, but I gloat every time one of those goes under) that have been chasing higher yields from sub-prime bonds. I think if the exposure is more or less in line with the Lehman total bond index or less, even if the sub-prime losses are huge, the overall affect on fund holdings will not be too bad. If 20% of government-backed mortgage bonds were total losses and 50% of commerically backed assets, that would still only knock off about 10% of the value from the Lehman index, and I think that's a worse case scenario, including no government bail-out. And with a balanced fund, you exposure would be much less.

There are funds out there that are overexposed to sub-prime that could take a much bigger hit, especially aggressive funds that use leverage.
Print the post Back To Top
No. of Recommendations: 0
Here's a key section:

Owners of mortgage securities that have been pooled, for example, do not have to reflect the prevailing market prices of those securities each day, as stockholders do. Only when a security is downgraded by a rating agency do investors have to mark their holdings to the market value. As a result, traders say, many investors are reporting the values of their holdings at inflated prices.

Check your bond funds carefully!

(Wasn't Sarbanes-Oxley supposed to require that these things get marked-to-market daily?)
Print the post Back To Top
No. of Recommendations: 1
FGMXX Fidelity's Government money market fund

Money market funds are required to hold short-duration (both individually and in the aggregate), top-quality bonds. There's no way a money market fund could hold subprime bonds.
Print the post Back To Top
No. of Recommendations: 0
I think the key thing with the sub-prime issue remains looking at your own exposure objectively. The financial press tends toward Naional Enquirer style reporting. There is certainly a real problem with sub-prime lending and the packaging of mortgage securities, and it is possible to effect of unwinding on the economy, not to mention the affected home-owners, could be significant. But exposure to the mortgage securities for most individuals will be minimal.
Print the post Back To Top
No. of Recommendations: 0
Print the post Back To Top
No. of Recommendations: 1
(not to mention hedge funds, but I gloat every time one of those goes under)

Why do you gloat? It's not only rich folks money, some pension funds have placed money (from regular folks like you and I) into hedge funds.
Print the post Back To Top
No. of Recommendations: 0
Check your bond funds carefully!

So true! Here's the statement from my infamous 401k Core Bond fund replacement:

Intermediate-term bond funds have average durations that
are greater than 3.5 years and less than six years. Most of
the funds rotate among a variety of sectors in the bond
market, based upon which appear to offer better values.


Top 10 Holdings as of 12-31-06 % Assets
FNMA 5.5% 04-01-34 1.14
FHLMC 5% 09-01-33 1.12
FHLMC 5% 05-01-18 0.73
FHLMC 03-01-36 0.68
FHLMC 5.5% 04-01-33 0.63
FHLMC 5.5% 12-01-34 0.58
FNMA 5% 07-01-35 0.51
FNMA 5% 04-01-34 0.51
US Treasury Note 4.625% 08-31-11 0.50
US Treasury Note 3.75% 05-15-08 0.49

Note the durations. I'm sure the durations average out to 3.5-6 years...

Here's the Morningstar category allocation:

Sectors as of 12-31-06 Fund% Category%
Cash 6.85 12.32
Credit 19.76 33.17
Foreign 2.37 2.91
Mortgage 36.68 34.29
US Government 34.34 17.31

It follows the Lehman Brothers 5-10 Year Government/Credit Index and is composed of U.S. Treasuries, agency debentures, and corporate bonds.

The fund follows the index and the stated strategy by holdings in FNMA and FHLMC.
Print the post Back To Top
No. of Recommendations: 0
There is certainly a real problem with sub-prime lending and the packaging of mortgage securities, and it is possible to effect of unwinding on the economy, not to mention the affected home-owners, could be significant.

It may also affect the Alt-A category - those between sub-prime and prime borrowers.

http://www.realestatejournal.com/buysell/mortgages/20070302-simon.html

Data from UBS AG show that the default rate for Alt-A mortgages has doubled in the past 14 months. "The credit deterioration has been almost parallel to what's been happening in the subprime market," says UBS mortgage analyst David Liu.
Print the post Back To Top
No. of Recommendations: 1
Intermediate-term bond funds have average durations that
are greater than 3.5 years and less than six years. Most of
the funds rotate among a variety of sectors in the bond
market, based upon which appear to offer better values.

Top 10 Holdings as of 12-31-06 % Assets
FNMA 5.5% 04-01-34 1.14
FHLMC 5% 09-01-33 1.12
FHLMC 5% 05-01-18 0.73
FHLMC 03-01-36 0.68
FHLMC 5.5% 04-01-33 0.63
FHLMC 5.5% 12-01-34 0.58
FNMA 5% 07-01-35 0.51
FNMA 5% 04-01-34 0.51
US Treasury Note 4.625% 08-31-11 0.50
US Treasury Note 3.75% 05-15-08 0.49

Note the durations. I'm sure the durations average out to 3.5-6 years...

Here's the Morningstar category allocation:

Sectors as of 12-31-06 Fund% Category%
Cash 6.85 12.32
Credit 19.76 33.17
Foreign 2.37 2.91
Mortgage 36.68 34.29
US Government 34.34 17.31

It follows the Lehman Brothers 5-10 Year Government/Credit Index and is composed of U.S. Treasuries, agency debentures, and corporate bonds.

The fund follows the index and the stated strategy by holdings in FNMA and FHLMC.

Mom,

I'm not sure what the big deal is here, other than trying to rotate in and out of sectors, which even if successful drives up the trading costs.

I assume by credit, they Morningstar means what Vanguard calls Financials. The % of Mortgage bonds in the Total Bond Index, which also includes corporates, is about 35% Government Backed and 6% Commercial backed. f I'm understanding your Morningstar information, your fund is heavy on Treasuries (unless they are lumping GNMA's with Treasuries) and low on financials and pretty close to the index on mortgage securities.

With exception of the mortgage bond coming due in 2018, the rest of the top holdings are 30 year mortgage bonds (some a couple of years since issue). There has been some "creative" lending with 30 year bonds (as with no principal), but most of the worries are with ARMs, which are not listed (at least when I've looked at availability from Vanguard brokerage) with a maturity date (the 30 year mortgage bonds do indicate continuous call provisions).

So, I think you are looking at some exposure to high risk mortgages, but not a whole lot. I'd be more worried about 5%/5.5% mortgage bonds, which are not going to get a whole lot of refinancing, except if people move, which are going to lose value from 30 year mortgage interest rates at 6.5%. I would expect that to take more of a toll on the fund than any defaults.
Print the post Back To Top
No. of Recommendations: 0
This article talks about "High Income" funds being heavy on mortgage junk:

http://www.nytimes.com/2007/03/14/business/14debt.html?_r=1&oref=slogin

I really think it is going to be particular funds that are in danger, although those tracking the Aggregate Bond or Government/Credit will have some exposure, I still think 10% loss as the worst case scenario, probably much less.
Print the post Back To Top
No. of Recommendations: 0
Excellent Steven Pearstein column in Post tracing history of the mortgage lending mess (with good humor):

http://www.washingtonpost.com/wp-dyn/content/article/2007/03/13/AR2007031301733.html
Print the post Back To Top
No. of Recommendations: 0
From the article:

Steven Pearlstein will host a Web discussion today at 11 a.m. at washingtonpost.com.

I'm assuming that's Eastern time.
Print the post Back To Top