Freeze hits Mortgage Backed Securities (MBS)

Traders in the crisis-hit mortgage-backed securities
(MBS) market have begun reporting a freeze-up, a near halt in all generation
of the securities known as collateralized debt obligations (CDOs), a week
after the two collapse of two big Bear Stearns hedge funds trading in CDOs. So, the attempt to isolate the collapse in real estate prices has failed, so it seems.

This can start to have a big effect on the MBS market as well. With
paper creation in this $2.6 trillion market having sunk to a couple of
billion dollars last week, the vice-chairman of Loomis Sayles in Boston
warned, "If investors start dumping them, oh, boy, watch out for some
massive credit widening," using market slang for a sharp interest in
interest rates, a credit crunch in the market. Interest rate premiums
on CDOs jumped 1.5% last week.

The specter of this disintegration of markets based on mortgage
securities threatening the whole financial system, raised its head in a
Congressional hearing June 26. Rep. Carolyn Maloney (D-NY), waving that morning's
{Wall Street Journal}, asked SEC Chairman Christopher Cox if he agreed that
CDOs and related securities are risky, dangerous to the financial system,
opaque in value, and should be regulated? With journalists and aides suddenly
taking furious notes, Cox said he lacked the authority because these
securities are not registered under the 1933 Securities and Exchange
Act; but that if Congress changed that, "Absolutely," they should be
regulated due to that risk. And he announced that the SEC has opened an
investigation of the Bear Stearns hedge funds and 12 other cases that relate
generally to sub-prime.