Special Report: Subprime bond bounces back, leaving behind a subprime borrower

(Reuters) – During the crazy days of the housing bubble in 2006, bankers created a bond called MABS 2006-FRE1. The instrument gave buyers the right to payments on the subprime housing loans of nearly 2,000 borrowers, including Stephen Monzione, a professional wedding photographer in New Hampshire.

Six months after the security was issued, a trader called it a “crap bond.” Monzione, with a monthly income of about $900 and mortgage payments of $927.22, eventually stopped paying. So did hundreds of other people. The bank that originated the loans went bust. The bond’s value crashed to 16 cents on the dollar.

Today, the subprime bond is rising from the ashes. The subprime borrower isn’t.

A hedge fund manager in Colorado snapped up MABS 2006-FRE1 last summer and more than doubled his money in four months, thanks to a surge of investment into financial markets by the Federal Reserve.

The U.S. central bank hasn’t been as helpful to Monzione. The 60-year-old lost a foreclosure battle and must be out of his home by the end of July.

“God bless them,” Monzione marvels at the traders who flipped the bond of which his loan was a part. “I don’t have a clue about what the hell that means to me personally.”

Monzione has put his finger on a strange disconnect. Some 57 percent of borrowers’ loans in MABS 2006-FRE1 are delinquent by 60 days or more, but the bond came roaring back nevertheless. Curiously, its recovery had little to do with the real-world fates of the individuals behind the bond.

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