Tag - Cdo

Shares of Luminent Mortgage Capital, Inc. (NYSE: LUM) are tumbling today after J.P. Morgan downgraded the real estate investment trust to a rating of “underweight” from “neutral.”

J.P. Morgan analyst Andrew Wessel said he downgraded Luminent on two major factors, including the entity’s exposure to the residential mortgage market and the firm’s poorly timed decision to begin taking on credit risk by entering the collateralized debt obligation (CDO) asset management business.

General credit and liquidity headwinds are taking their toll on this small-cap REIT. Wessel told clients he advises against holding exposure to the residential mortgage industry until the market for loan sales regains liquidity and the securitization market reopens.

Additionally, according to Wessel, Luminent Mortgage’s decision to enter an asset backed security business (ABS) could not be more poorly timed given tightening credit conditions that appear to be mopping up liquidity and causing the broader market to swoon.

“Given all the negative headlines surrounding the space, we believe investors may steer clear of most deals in those markets backed by residential mortgage credit until national housing prices stabilize and the poorly underwritten 2006 vintage loans achieve more seasoning,” Wessel wrote in a research note. “…We therefore recommend that investors step to the sidelines on LUM.”