Wall Street Watch: From Giant Fund, a Caveat on Standards

The manager of the world's largest pension fund says his appetite for mortgage-backed securities remains robust, but he is sounding a note of caution to mortgage bankers.

"Keep up your credit standards," said Edward J. Grzybowski, director of portfolio management for the $160.6 billion Teachers Insurance and Annuity Association College Retirement Equities Fund.

Disciplined underwriting produces securities that don't deliver unexpected hits to portfolios, said Mr. Grzybowski. He controls about $9.2 billion of mortgage-backed securities.

Stability is especially important to investors like Teachers that rely on mortgage securities as a mainstay of their portfolios, he said.

Despite his concern about credit standards, Mr. Grzybowski remained bullish about mortgages in an interview with American Banker, saying he hopes mortgage banks will "issue more paper."

He said the fund is always interested in new deals, whether they be private transactions or agency issues.

The New York-based fund, which invests on behalf of 1.8 million educators and researchers, has a team of seven analysts whose sole job is to research and invest in mortgage securities. "They're constantly looking for the best value in the market," Mr. Grzybowski said.

Right now, about 12% of the retirement fund's $79.8 billion of actively managed assets are in mortgage-backed securities, Mr. Grzybowski said.

The investments add stability to the fund, either through AAA ratings or implied government guarantees, Mr. Grzybowski said.

He also said the investments are attractive because their yields surpass those on corporate bonds.

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Aames Financial Corp. has issued $200 million of mortgage securities, one of the largest private transactions so far this year.

"By current standards it's significant," said Michael Schumacher, head of mortgage-backed securities research at Smith Barney, New York.

The mortgage securities are backed by roughly equal amounts of fixed- and variable-rate home equity loans.

Prudential Securities, Natwest Capital Markets Ltd., and CS First Boston Corp. underwrote the deal.

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PEOPLE ON THE MOVE. Heidi Katz has joined Fitch Investors, New York, as associate director involved in rating home equity and residential mortgage deals. Ms. Katz was recruited from Financial Guarantee Indemnity Corp., New York, where she was a manager in the structured finance group.

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