Profiting from troubled housing loans

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 fuelling 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.

And it is not just vulture hedge funds swooping in to try to pluck the last remaining gold from the ashes 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 US government housing agency. The demand for securitisations 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 per cent 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 per cent yield on a 10-year Treasury note. So far this year, there have been 28 deals backed by US$7 billion worth of nonperforming loans sold to investors, according to Intex Solutions, a structured finance cash-flow modelling firm. Last year, Intex said, there were 72 deals backed by US$11.6 billion worth of nonperforming loans.