Collateralized Mortgage Obligations

Investor: Triple EEE Foundation
Investee: Various investment-grade collateralized mortgage obligations (CMOs)
Asset Class: Equity-like Debt
Investment Amount: $250,000
Impact Sector(s): Community & Economic Development; Housing
Date of Investment: Various times during 2008 and 2009
Projected Exit: Varied from 2010 to 2016
Financial Return Goal: Market Rate

 

The Triple EEE Foundation was founded in 1993 and focuses on opportunities that build people’s esteem. While it makes grants nationwide and internationally, it primarily concentrates its giving in the Chicago area. In addition to grant-making activities, the Triple EEE Foundation engages in impact investments and plays an active advocacy role nationwide to increase education and awareness for impact investing among foundations.

 

Misuse of collateralized mortgage obligations (CMOs) is generally cited as one source of the Great Recession of 2008. For this reason, at the time of purchase many investors (including institutional investors) wanted no part of CMOs and were selling their current holdings at prices far below perceived value, yielding substantial current interest and returns to maturity. This was true even though the CMOs were rated investment grade by the rating agencies and therefore were high grade in nature. Thus, the CMOs met the risk/reward financial requirements of the Triple EEE Foundation's investment policy statement.

 

Upon analysis, the CMOs also met the impact investing requirements of the investment policy statement. Because the market for CMOs was weak, the foundation believed that any investment in CMOs (however small) would help support the financial backbone of the housing market and indirectly help to prevent foreclosures. Additionally, many CMOs were covered by the federal government’s Home Affordable Modification Program. Under that program, holders of certain CMOs had to vote on whether renegotiation of mortgages held by the CMO would be allowed to prevent foreclosure. EEE always voted for renegotiation of mortgages. The foundation believed that making an investment that helped to support the housing market and reduce foreclosures was fully in line with its goal of helping people’s self-esteem.

 

The foundation’s investment advisor recommended the investment as meeting the foundation’s financial and impact investing goals.

 

None

 

The foundation was able to make a safe, lucrative financial investment yielding annual returns in excess of 14 percent at a time when the markets were generally in turmoil. The foundation was able to use its endowment funds in a low-risk way to support the mortgage market and the renegotiation of mortgages, so that fewer people were forced into foreclosure and out of their homes.

 

Take advantage of opportunities to engage and educate financial institutions and advisors when appropriate. Triple EEE Foundation had numerous conversations with financial institutions to get them to see mortgage renegotiations as a win-win that was financially in the best interest of the institution and good for people who were at risk of foreclosure.