The Catholic University of America



 Bingham senior partner John Arnholz is co-author of “Offerings of Asset-Backed Securities." 


Back to the Future with Collateralized Mortgage Bonds


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As irresistible as Halloween candy to children, some of the financial instruments that are widely viewed as having played a major role in the severe recession of 2007-2008 are rushing back into favor with lenders and big banks. 

Will their resurgence lead to a different outcome this time? That was the question addressed during “Mortgage Bonds, their demise and rebirth.....are we ready for this?” a talk given at the Columbus School of Law on Oct. 30 by John Arnholz, a senior partner with Bingham in its Washington DC office and a former adjunct lecturer in the Catholic University Securities Law Program.
Considered one of the city’s leading attorneys in the field of securitized assets and specifically collateralized mortgage bonds (CMOs), Arnholz spent more than an hour with students describing the role of CMOs in the economic collapse of five years ago and what, if anything, will help prevent a recurrence.  
“For many, the perception was that the evil microbe that created this financial havoc was some instrument of which we knew little called the collateralized mortgage bond, an instrument created by a process referred to as a securitization of assets,” explained law school Professor David Lipton, director of the of Securities Law Program, by way of introduction.
Securitization of assets—also called repackaging—can quickly create vast oceans of liquid capital, money that in retrospect, lenders may have disbursed to homebuyers and refinancers without adequate safeguards, eventually causing a housing bubble that spectacularly burst.
It took five years for the market and for lending liquidity to return. Even now, unemployment has not normalized nor have all the government loans been repaid.
Nonetheless, “securitization is a hugely powerful tool that is now beginning to reassert itself,” said Arnholz.
One key difference from five or six years ago is the safeguards adopted by the Dodd Frank Act in 2012. The complex law was written and passed mostly in response to the financial crisis of the time.
The new safeguards include a requirement that lenders purchase a portion of the securitized instruments that are issued and that mortgage loans meet certain standards of safe lending practices.
However, the question of whether the nation remains susceptible to an unrealistically heated housing market and its concomitant burgeoning mortgage issuance industry remains open.
Arnholz, who heads the structured finance practice at Bingham and is co-author of an important treatise in the field, “Offerings of Asset-Backed Securities,” refrained from predicting a Great Recession II, even as he noted the “excessively cheap money” sloshing through the system for loans the first time could reappear alongside the financial practices that gave birth to them.
“Cheap mortgages led to a home buying frenzy,” he reminded the student audience. “Prices rose incredibly fast…and crashed just as quickly.”
Arnholz’s lecture was sponsored by the Securities Law Program.