Rises in housing prices have been profitable to private equity firms and institutional investors that bought foreclosed homes to flip them or to rent them out. Now the recovery in housing is fueling a niche market for newly minted bonds that are backed by the most troubled mortgages of them all: those on homes on the verge of foreclosure.
Matthew Goldstein reports from The New York Times it is not just vulture hedge funds swooping in to try to profit from the last remnants of the housing crisis. The investors making money off these obscure bonds — none are rated by a major credit rating agency — include American mutual funds. And one of the biggest sellers of severely delinquent mortgages to investors is a United States government housing agency.
The demand for securitizations of nonperforming loans illustrates Wall Street’s never-ending hunt for higher-yielding investment opportunities. The market also reflects in part an effort by regulators to close a chapter on the housing mess.
For mutual funds and other institutional investors, the appeal of these bonds is obvious. They have yields of about 4 percent and pay out quickly — often in just two years — if the foreclosure process on the loans in the portfolio goes smoothly. The yields look enticing compared with the current 2.42 percent yield on a 10-year Treasury note.
