Perhaps the biggest issue facing the mortgage-backed security market in 1993 was the surge in prepayments spurred by the large volume of refis. Those prepayments resulted in many investors writing off large losses - including some nationwide municipalities that bought interest-only strips. Most of these investors simply didn't understand the complexities of their investments.
The trend has given the mortgage securities market something of a black eye, and new chairman of the Public Securities Association Mortgage-Backed Securities Division, Nathan Kornfeld, who has 15 years of investment banking under his belt, plans to counter that by educating investors about those risks in 1994.
As the managing director for the risk management fixed-income division at Lehman Brothers, Kornfeld knows the dangers involved with mortgage-backed securities. He, fears that many of the prepayment models that were gauged too slow last year may be overcompensated for in 1994, resulting in models that run too fast.
More losses are on the way, but the PSA plans to add to its educational agenda by conducting impartial seminars aimed at improving investor awareness. Some of the investor seminars conducted now, he said, give people a one-sided view of the market. "The PSA classes will stay away from saying what's a good bond and what's not - that's not our job," he said. But with the PSA assisting, maybe some of the self-professed "sophisticated" investors will be able to prevent some of the huge losses they've written off.