Risk in the mortgage market may be severely understated, according to new research that calls into question the ability of rating agencies to assess the dangers of collateralized debt obligations backed by mortgages and communicate them to investors.A paper presented at the Hudson Institute, a nonpartisan public policy research organization based in Washington, found that such CDOs could experience significant losses if the U.S. housing market continues to stagnate. "We don't want to shut down" mortgage-backed securities, said one of the study's authors, Joseph Mason of the LeBow School of Business at Drexel University. "We're only looking for greater transparency to foster stability." As it is now, Mr. Mason said, rating agencies "can't look under the hood of these deals unless they are qualified investors." But Michael Fratantoni, senior director of single-family research and economics at the Mortgage Bankers Association, played down the research, saying that while CDOs are complicated, they should not be looked at in isolation. "Complexity is in the eye of the beholder," the MBA economist said. "There is no lack of information." However, Mr. Mason warned that the rise in private-label CDOs that are not backed by the government is a potential threat to the economy if home prices depreciate. "It won't start a recession," he said. "But if we get into an economic downturn, it could widen."
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A federal judge in Texas dismissed the Consumer Financial Protection Bureau's medical debt rule and prohibited states from passing their own laws prohibiting medical debt on credit reports.
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Dr. Mark Calabria takes on the additional role of chief statistician of the United States; retired Ally Bank executive Diane Morais has joined First Citizens Bancshares' board of directors; MainStreet Bank has promoted Alex Vari to chief financial officer; and more in this week's banking news roundup.
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While refinances are behind the latest increases, the pace of purchase activity may be a stronger indicator of where the housing market sits.
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The share of economists expecting a September rate reduction grew in the July Wolters Kluwer survey, but the October or later percentage also increased.
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Rising home prices and softening sales offer a mixed view of a market that some say is shifting to favor buyers.
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The notes are backed by home improvement installment loans originated by approved dealers in Foundation Finance Company's network.
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