U.S. Re-Inflates the Housing Bubble
Mortgage Bonds That Caused the Financial Crises are Regaining Popularity
High-risk, subprime mortgage bonds, the collapse of which caused the financial crises in 2008, are regaining popularity among long-term U.S. investors. Banks are very willing to lend under these securities, and lenders are hoping that subprime mortgages have been made safer through the efforts of the authorities.
High-risk, subprime mortgages and other loans for housing are becoming increasingly popular with investors, said the Wall Street journal this Friday. This is a sign that the U.S. economy is recovering from the crisis and restoring confidence in securities, which started the crisis in the first place.
The last quarter, which ended on Thursday, became the most successful for the U.S. stock market since 1999. The Dow Jones index rose by 6.41% in six months.
This bodes well for the whole year – the stock market is expected to see growth in some of its securities by 81 percent in a year.
Interest in risky bonds is fueled by the U.S. Federal Reserve System, which holds refinancing rates at the lowest possible levels, making the minimum profit for highly reliable securities. However, at this time, investors prefer to use so-called non-agency bonds rather than the agencies Fannie Mae and Freddie Mac.
These securities yielded an increased return of 20 percent during the downturn, and now stand at 5 to 7 percent in their annual returns. In comparison, government bonds yield 3.5 percent in annual returns, and the leading corporate bonds yield 4 percent.
The price of most bonds rose from 30 cents during the lowest point of the crisis, to 60 cents on the dollar, and in recent months bond yields have stabilized, which is attracting conservative investors.
Demand for high-risk bonds is so high that the FRS is able to profitably sell bonds purchased in support of the market during the financial crisis. On Thursday, the FRS announced the impending sale of AIG bonds for billions of dollars. For now, high-risk bonds are being sold by hedge funds and other investors who bought depreciating debts two years ago and have now decided to cash in.
Those who bought the subprime bonds are bringing them back to the banks, which are once again willing to lend under this security.
"I would not say we are back to the old days," said Scott Robinson, a senior vice president at Moody's Investors Service. But some investors are snapping up risky assets because "cautious optimism and relatively high capital levels has resulted in some re-risking of balance sheets." MFA Financial Inc., a publicly trading company, has been investing in mortgage bonds since the market stabilized, doubling its holdings in 2010. The MFA was then buying $100 million worth of bonds every month, a figure that has now grown to $300 million. Invesco Mortgage Capital, a company that invests in real estate, had invested $876 million in high-risk bonds last year and now plans to borrow against that to invest more, said its Chief Financial Officer Donald Raymon.
“Mortgage bonds are a good investment that will yield benefits to those who have time to buy them while they are cheap,” says the head of the analytical department of the Russian investment company Trade Invest, Sergei Korobkov. “In February, the price of new homes fell by 13.9 percent - an all-time record. The price of a detached home in the U.S. is $202,000, which is $156,000 on the secondary market. The fall is due to the fact that many homes put up for sale are ones that were seized for debt delinquency." In addition, because of the extremely low rate of refinancing, FRS mortgages are issued with a small interest rate. "As soon as the FRS interest rate starts to increase, which could happen in the fall of 2011, the cost of mortgages will increase. And the cost of securities will follow," he predicts. Economic recovery is also evidenced by reduced unemployment. "Just in the last three months, unemployment fell by 0.9 percent. The U.S. is creating 200,000 jobs every month. This promises to restore effective demand," said the expert.
Investors are hoping that the return of the mortgage bond market does not create a new threat to the economy. The U.S. government has set more stringent requirements for mortgage lending: it is not permitted to lend to the unemployed, it’s not permitted to lend without collateral. But the risks remain.
"The market may still bring unpleasant surprises. The likelihood of another mortgage-related crisis remains,” warns the deputy head of the analytical department of the Russian company Sovlink, Olga Belenkaya. “The situation in the housing market remains difficult. Oversupply persists. The level of arrears on mortgages in the U.S. in the fourth quarter of 2010 was 9.94 percent. This is slightly less than the maximum – 11.3 percent, in the second quarter of 2010, but far from the norm of 1 to 3 percent.”
High-risk, subprime mortgage bonds, the collapse of which caused the financial crises in 2008, are regaining popularity among long-term U.S. investors. Banks are very willing to lend under these securities, and lenders are hoping that subprime mortgages have been made safer through the efforts of the authorities.
High-risk, subprime mortgages and other loans for housing are becoming increasingly popular with investors, said the Wall Street journal this Friday. This is a sign that the U.S. economy is recovering from the crisis and restoring confidence in securities, which started the crisis in the first place.
The last quarter, which ended on Thursday, became the most successful for the U.S. stock market since 1999. The Dow Jones index rose by 6.41% in six months.
This bodes well for the whole year – the stock market is expected to see growth in some of its securities by 81 percent in a year.
Interest in risky bonds is fueled by the U.S. Federal Reserve System, which holds refinancing rates at the lowest possible levels, making the minimum profit for highly reliable securities. However, at this time, investors prefer to use so-called non-agency bonds rather than the agencies Fannie Mae and Freddie Mac.
These securities yielded an increased return of 20 percent during the downturn, and now stand at 5 to 7 percent in their annual returns. In comparison, government bonds yield 3.5 percent in annual returns, and the leading corporate bonds yield 4 percent.
The price of most bonds rose from 30 cents during the lowest point of the crisis, to 60 cents on the dollar, and in recent months bond yields have stabilized, which is attracting conservative investors.
Demand for high-risk bonds is so high that the FRS is able to profitably sell bonds purchased in support of the market during the financial crisis. On Thursday, the FRS announced the impending sale of AIG bonds for billions of dollars. For now, high-risk bonds are being sold by hedge funds and other investors who bought depreciating debts two years ago and have now decided to cash in.
Those who bought the subprime bonds are bringing them back to the banks, which are once again willing to lend under this security.
"I would not say we are back to the old days," said Scott Robinson, a senior vice president at Moody's Investors Service. But some investors are snapping up risky assets because "cautious optimism and relatively high capital levels has resulted in some re-risking of balance sheets." MFA Financial Inc., a publicly trading company, has been investing in mortgage bonds since the market stabilized, doubling its holdings in 2010. The MFA was then buying $100 million worth of bonds every month, a figure that has now grown to $300 million. Invesco Mortgage Capital, a company that invests in real estate, had invested $876 million in high-risk bonds last year and now plans to borrow against that to invest more, said its Chief Financial Officer Donald Raymon.
“Mortgage bonds are a good investment that will yield benefits to those who have time to buy them while they are cheap,” says the head of the analytical department of the Russian investment company Trade Invest, Sergei Korobkov. “In February, the price of new homes fell by 13.9 percent - an all-time record. The price of a detached home in the U.S. is $202,000, which is $156,000 on the secondary market. The fall is due to the fact that many homes put up for sale are ones that were seized for debt delinquency." In addition, because of the extremely low rate of refinancing, FRS mortgages are issued with a small interest rate. "As soon as the FRS interest rate starts to increase, which could happen in the fall of 2011, the cost of mortgages will increase. And the cost of securities will follow," he predicts. Economic recovery is also evidenced by reduced unemployment. "Just in the last three months, unemployment fell by 0.9 percent. The U.S. is creating 200,000 jobs every month. This promises to restore effective demand," said the expert.
Investors are hoping that the return of the mortgage bond market does not create a new threat to the economy. The U.S. government has set more stringent requirements for mortgage lending: it is not permitted to lend to the unemployed, it’s not permitted to lend without collateral. But the risks remain.
"The market may still bring unpleasant surprises. The likelihood of another mortgage-related crisis remains,” warns the deputy head of the analytical department of the Russian company Sovlink, Olga Belenkaya. “The situation in the housing market remains difficult. Oversupply persists. The level of arrears on mortgages in the U.S. in the fourth quarter of 2010 was 9.94 percent. This is slightly less than the maximum – 11.3 percent, in the second quarter of 2010, but far from the norm of 1 to 3 percent.”