MBS: housing's canary in a coal mine?

One sign that the housing downturn has bottomed out in a given market is when investors start snatching up homes they consider bargains.

A similar phenomenon is expected in the market for mortgage-backed securities (MBS) and collateralized debt obligations (CDOs). It's an eagerly awaited development by those who see an end to the credit crunch as a necessary precursor to a housing recovery.

CNNMoney staff writer Grace Wong writes today that while billions of investment capital has been rounded up to snatch up MBS and CDOs at bargain prices, the feeding frenzy has yet to begin. Investors don't think the prices on these "illiquid" investments have hit bottom, Wong writes. The recent creation by banks of a fund that would buy up structured investment vehicles (SIVs) used by buy such securities (see Inman News story) may be artificially propping up prices, former Fed chairman Alan Greenspan has said.

The cliche is that investors are afraid of "catching a falling knife." In the mean time, to trot out another cliche, stocks continue to "climb a wall of fear" on hopes that the Federal Reserve will make another bold move on short-term rates this week. 

Mortgage broker and Inman News columnist Lou Barnes says even more important are the employment numbers coming out Friday, because job gains are "the only thing holding mortgages above 6 percent."

Barnes agrees that we can expect to see much bigger losses on CDOs than Wall Street firms have reported to far, and sees efforts by banks to prop up SIVs as "Freddie Krueger dressed up as a nice-looking kid."

IF MBS and CDO markets are in fact a "canary in the coal mine" predictor of the future health of housing markets, sounds like a good time to make sure the oxygen masks are working.

All rights reserved. This article may not be used or reproduced in any manner whatsoever, in part or in whole, without written permission of Inman News. Use of this article without permission is a violation of federal copyright law.