Subprime Mortgages Appear To Be Making A Comeback
April 6th, 2011
While it might be difficult to believe – after all, just three years ago these questionable products were critical to wrecking the housing market – “investors are regaining their appetite for subprime,” according to a Wall Street Journal report [1]. Since the housing crisis, subprime mortgage bonds have doubled in value, and investors are buying them “in hopes of earning a big return.” In fact, prices have doubled from the time of the housing crisis from 30 cents on the dollar to 60 cents, “underscoring how investors have regained the courage to take on more risk as the economy recovers”[2].
Interestingly, this could actually help fuel the recovery, as investor willingness to take on nonconventional assets could encourage banks to make more nontraditional loans and charge less interest on those loans. Investors are actually looking for “old” subprime mortgage securities that are still in the market since they have been massively distressed and devalued in recent years. Long-term investors hope to lock in gains and are even able to borrow money from banks to purchase these investments. Troubled lender AIG, which was bailed out by the government due to “bad bets” on subprime mortgages several years ago, actually recently offered to buy back a pool of such bonds that the Federal Reserve purchased from it during the crisis. Notably, the Fed rejected the offer, but only to initiate its own selling initiative in which investors can bid for pools of bonds and individual securities in order to “maximize profits.”
Moody’s Investors Service senior vice president Scott Robinson emphasizes that “I would not say we are back to the old days.” However, Robinson admits that “cautious optimism and relatively high capital levels” has resulted in investors’ willingness to take on new risks.
Do you think that the re-entry of subprime loans into the investment market is a good thing? Will this help or hurt the housing recovery?
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[1] http://www.theatlantic.com/business/archive/2011/04/are-subprime-mortgages-returning/236806/
[2] http://online.wsj.com/article/SB10001424052748704530204576235010413833114.html
April 6th, 2011 at 6:04 AM
The subprime market was not the problem. It was the idiotic lenders that would lend $200k plus home loans to people that work at Burger King for a minummum wage salary and can’t afford to make the payments on a home like this just because they had a good credit score. The loans that actually caused the problems were the no doc loans that are actually for investors and people that make high wage salaries. If they get it together and make strict guidelines on these types of loans there would never be problems!
April 7th, 2011 at 2:14 PM
With enough money down, anyone can get a no doc loan.