NY Times: Investors Getting Richer on Foreclosure Risk

In the aftermath of the Recession investors benefited from opportunities to buy and flip foreclosed homes as prices rose, but now that the recovery is in full-swing, a new niche market is emerging driven by investors looking to profit on homes on the brink of foreclosure, reports The New York Times.

These newly minted bonds backed by mortgages on the verge of foreclosure are attracting investors and sellers of all types, including banks, hedge funds and even the Department of Housing and Urban Development (HUD).

A decision from HUD to begin selling some of the “most severely” delinquent mortgages guaranteed by the Federal Housing Administration in efforts to avoid losses to taxpayers served as the catalyst for the emergence of the new market, NY Times writes.

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“Since 2010, HUD has sold 101,290 soured home loans with a combined unpaid balance of $17.6 billion in more than a dozen auctions, and more distressed sales are planned,” the article states.

Part of the draw is that these bonds have yields of about 4% and pay out often in just two years, depending on how smoothly the foreclosure process goes for the loans in the portfolio. Compared to a 10-year Treasury note, the yields on these bonds are enticing, 2% versus the current 2.42%, the article notes.

Another lure for mutual funds is a low risk of loss on these bonds, mostly because their relative exposures are small.

One JPMorgan spokeswoman told the NY Times that the bank’s portfolio managers are comfortable investing in these unrated bonds because they have a “short duration yet provide yields higher than many longer duration assets.”

Though the market for these bonds remains smaller than the heyday of the mortgage-backed securities market prior to the financial crisis, demand is expected to grow as institutional investors continue to search for yield and analysts estimate there are still $660 billion worth of delinquent mortgages in the U.S.

Read more at The New York Times.

Written by Jason Oliva

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