From Trash to Treasure? Toxic Mortgage Bonds Are Gaining in Popularity
by Lisa Swan on February 22, 2012
It’s back! Some of the very people and institutions who made big bucks betting against mortgage bonds before the housing crisis are now snatching up the most toxic of these mortgage bonds – and hoping to make treasures out of trash.
Bloomberg News notes that investors like John Paulson and Kyle Bass – who made hundreds of millions and, in Paulson’s case, billions, in their betting against the housing market when the subprime market collapsed, are now putting in a pretty penny to buy mortgage bonds. And guess who else is investing – Goldman Sachs, Credit Suisse and even American International Group, the company who lost its shirt in the housing crisis, and had to get bailed out by the government (So why is AIG investing in anything these days?)
There is a $1.1 trillion market for these mortgage bonds that are not backed by the government. Bloomberg News says that some of these investors appear to be thinking that the market has sunk so low, that there is nowhere to go but up.
Larry Penn, CEO of Ellington Financial, tells Bloomberg News that there is a potential for these bonds to have “a very high yield based on the prices that bonds are trading at.” He says that with interest rates so miniscule these days, “if you can buy something where you can end up with a double-digit yield under severe assumptions, that’s great.”
There has been a little positive movement as of late in mortgage bonds; the bonds tied to ARMs went from 49 cents on the dollar in November to 55 cents on the dollar in February. Clayton DeGiacinto, CIO of Axonic Capital, said the mortgage bonds were bouncing up “almost like a coiled spring.” Those who invested, especially AIG, better hope that the rates continue to bounce up. Otherwise, they could be losing their shirts.
Lisa Swan is a Feature Writer for the Compliance Exchange. She is also a columnist for The Faster Times and a blogger for Subway Squawkers. Her work has also appeared in the New York Daily News, Yahoo Sports, Huffington Post and the books Graphical Player 2011 and Graphical Player 2010.
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