Your retirement portfolio is probably overweighted in bonds. If the inflows to bond mutual funds are any indication and the rising popularity of target date funds as the default investment for new investors just beginning their retirement journey are any indication, the trust you place in the issuer of these fixed income tools is a primary concern.
The question is why? Not why do you have so many bonds. But what new opportunities will the fund managers have if the bonds they purchase are not as secure as they should be? Bonds are debt instruments. Mortgages are debt contracts. The ability to bundle these contracts into debt instruments (mortgage backed securities) and offer them to investors is key to any economic recovery. But how do you avoid the problems that faced investors in 2008 (where these securities were less than what they were sold to investors as)? Make the issuer hold some of them in their own portfolios.
At the heart of the Obama administrations efforts at fixing the financial system is the promise that the industry take the same risks as the investor. In other words, Mr. Obama, with the support of Congress, thinks that keeping some skin in the game is a surefire way to keep the banks honest.
There have been reports that investors feel more confident when their mutual fund managers invest in the fund(s) they manage. But will the same feeling translate itself into the world of MBS’ if the banks do the same? The American Bankers Association, the Commercial Real Estate Finance Council, the Mortgage Bankers Association and the Securities Industry and Financial Markets Association think otherwise citing the meltdown as the result of these institutions having too much “skin” in the mortgage market. It is true, they did hold a great deal of sub-prime mortgages on the books when the fallout began but they should also note, it was those institutions who issued the bad paper.
This sort of regulatory requirement would force the bankers to issue better, longer-term mortgages and retain the riskiest part of the portfolio. “Mainstream products should not require risk retention,” says John Courson, chief executive of the Mortgage Bankers Association. “We believe it needs to be on the riskiest products.”
This would also benefit those of us worried about the short-term futures of our portfolios. Although retirement planning is not about the short-term, folks cannot seem to shake the near-term outlook for the products in their 401(k). Making loans better and more secure would not accelerate the economic recovery. Nor would it satisfy individual investors in financial institutions. But it would make this portion of the market more stable and less worrisome.
More here from Ruth Simon and Kara Scannell
Related posts: