Subprime Mortgages Appear to be Making a Comeback

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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