"… making CMOs eligible for the "to-be-announced" market — where generic issues are bought and sold before the bonds are actually delivered to investors — would lay additional supply on the market …" [you can say that again ]
Perhaps the golden age of financial engineering has not yet died. As reported by Reuters, some bright light has seriously brought up the possibility of recycling Collatoralized Mortgage Obligations (CMOs) into the GSEs’ To-Be-Announced (TBA) market for MBS debt sales. TBA (see slides 56-57 here) is supposed to be for pristine prime mortgage paper so good that the debt buyer will sign up for it sight unseen. The idea of recycling the stuff in a CMO, which has already been sliced and diced, into this flow recalls the business model of the ruminant digestive system (hence the diagram above) and seems entirely inappropriate (to this blogger, anyway).
Robert L. Townsend has referred to things like this as "Pissing in the Soup."
About three months ago some bright souls proposed putting Jumbos into TBA. At the time Paul Jackson at HousingWire suggested this was a questionable business to say the least. This latest proposal fairly reeks of even more risk than the earlier idea.
It looks like the lessons of TunaGate have to be learned over and over again.
Notes and References: "Mortgage securities market seeks liquidity measure", by Al Yoon, Reuters, November 5, 2008.
Re-packaging collateralized mortgage obligations, or CMOs, with attributes similar to plain-vanilla mortgage bonds could increase their values and help solve a nagging problem for dealers who have found the securities tough to sell as the global financial crisis turned investors away from risk. CMOs are created with basic "agency" MBS, but structured to make cash flows and prepayment risks attractive to investors.
A recent slump in trading in the overall market for guaranteed MBS issued by Fannie Mae, Freddie Mac and Ginnie Mae has been blamed for inflating mortgage rates that banks can charge to borrowers. Pricing on CMOs are now "significantly lower" than MBS with the same attributes, creating a negative arbitrage, SIFMA said in its letter.
But making CMOs eligible for the "to-be-announced" market — where generic issues are bought and sold before the bonds are actually delivered to investors — would lay additional supply on the market as it adapts to softened demand from investors such as foreign buyers, Fannie Mae and Freddie Mac.