“Of the borrowers that are still current, there’s a high likelihood that they will remain current”
Mortgage-backed securities back in vogue?
The collapse of mortgage-backed securities drove the financial crisis, but many fund managers are snapping up the pre-crisis offerings.
“We’ve seen strong demand for those assets recently,” said Dan Adler, a senior portfolio manager at Amundi Smith Breeden, adding the demand has been broad-based across the subprime, alt-A and prime offerings.
Some of the pre-crisis securities are trading “significantly below par,” and offer yields ranging from 2-6 percent, when adjusted for potential defaults, Adler said.
Boom, Bust and Blame – The Inside Story of America’s Economic Crisis Residential mortgage-backed securities, or RMBS, were one of the main drivers of the Global Financial Crisis. Investment banks bought housing loans of increasingly questionable quality, packaged them into securities and re-sold them into the market. Although many of the securities were initially highly rated by agencies including Standard & Poor’s and Moody’s (MCO), poor loan standards, outright fraud and a souring economy led to a slew of defaults, causing many RMBS to be viewed as essentially worthless. The domino effect took down storied investment banks such as Bear Stearns and Lehman Brothers and caused the worst recession since The Great Depression of the 1930s.
Revisiting the pre-crisis RMBS can be a difficult sell for some investors, Adler noted. “There is some reluctance for exposure to U.S. housing given the experience of 2008,” he said, noting that many tranches of the pre-crisis RMBS have little chance of ever paying out.
Why who owns which bonds is a risk But he believes these securities offer an attractive way to gain exposure to a mid-cycle housing market recovery, especially as further mortgage defaults become less of a risk.