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Subprime Residential Mortgage Bonds Make a Comeback

Subprime Residential Mortgage Bonds Make a Comeback

by Carla Palmer 25. April 2011 19:10

In a sign that long-term investors are becoming less risk-adverseas the economy recovers, subprime* and other non-agency residential mortgagebonds are becoming popular again.

Prices in the subprime bond market have doubled from theirlowest point during the crisis, of 30 cents on the dollar, to roughly 60 centstoday.

This resurgence signals that investors are willing to takeon more risk, and is reflected in increased prices among a large segment ofriskier assets, including stocks, commodities and even junk bonds.

First quarter 2011 marked the stock market’s best since1999, and strong first quarters usually bode well for the entire year.

Helping to push investors back into the subprime market is thequest for higher yields, at a time when the Federal Reserve has set interestrates on safe investments at historically low levels.

This new trend helps ordinary borrowers, too, as banks makeavailable more non-traditional loans like jumbo mortgages, and reduce theirinterest rates.

Equally reassuring to investors is that the prices on riskierbonds have stabilized over the past few months, giving conservative investorsmore confidence.

Even the Federal Reserve is taking advantage of changes inthe market by announcing it will sell off billions of dollars worth of subprimemortgage bonds it took on as part of its bail-out of AIG in 2008.

While sub-prime financing is not likely to be the same as itwas in the past, opening of the market may allow borrowers with less than 700credit scores to obtain financing in the near future.

*Subprime bonds are securities backed by hundreds orthousands of loans to homebuyers with spotty credit records.

- Carla Palmer 


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