Thursday, August 14, 2014

Securitizing non-performing loans

The practice of securitizing mortgages was one of the key drivers of the real estate bubble of a decade ago.  By bundling thousands of mortgages together as the principal of a bond fund and then selling shares of that fund to investors, Wall Street revved up an engine that demanded more and more mortgages for fuel.  The securitization process had been around long before 2004 but it seemed to have achieved new levels of intensity and innovation (not necessarily a good thing, as it turned out) in the early years of the 21st century.

One would think that the collapse of that bubble would have caused a reassessment of the securitization process as an investment vehicle.  According to today's entry in the Deal Book blog on the New York Times' website, that's not the case.  We now have a market for securitizing non-performing mortgages that are either in foreclosure or on the verge of foreclosure.  Last year more than $11 billion dollars worth of assets passed through this process.  There is an estimated $660 billion more in value tied up in nonperforming mortgages so this type of investment may become more popular.

It seems irrational to use "nonperforming" loans as in investment.  Where's the cash flow?  Well, there is none that comes in the form of monthly mortgage payments.  Instead, there are the proceeds from the auctions that occur as the mortgages are foreclosed.  Deal Book says these funds have been returning a 4% investment with a payout in 2 years.

Like I said, this all seems strange to me but anything that moves homes from the stagnation of non-perfoming mortgages to the potential of new, solvent owners is generally a good thing.  

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