by Justin L. Seekamp
A recent article in the New York Times covered the recent shift in investing in which investors are beginning to re-invest in mortgage backed securities. These are the same mortgage backed securities that many believe led to the housing bubble that burst in 2007-2008 which is still having repercussions today. The full article from the New York Times can be found here.
The article detailed commentary the actions of a Mr. Greg Lippmann, a former well-known trader at Deutsche Bank, who now runs LibreMax Capital. Mr. Lippmann is well-known in the investment community due to his apparent omniscient abilities as he told many investors back in 2006-2007 that the housing market was a “bubble ready to burst.” In those past days, Mr. Lippmann was known to those on Wall Street as “Bubble Boy.” Mr. Lippmann, his company, and many other investors are now buying those same securities built from mortgages that Mr. Lippmann bet against before the financial crisis erupted.
The change in policy for Mr. Lippmann and those like him has come as a result from several factors. One factor is that many believe that the housing slump may have bottomed out as sales of existing homes is picking up. Another factor is the recent $26 billion dollar settlement with the nation’s largest investors that is expected to provide some mortgage relief. Yet another is the fact that the Federal Reserve Bank of New York has been able to auction off billions of dollars of mortgage securities that it had acquired as part of the financial crisis bailout. The final factor to be mentioned here, probably the most important and there are certainly others, is that the mortgage backed securities, even if they have failing aspects of the investment, have resulted in returns of at least 4-5% and up to 12%. With returns that high it is likely that the uptick in investing in mortgage backed securities comes primarily from the fact that investments with high returns are attractive for investors despite the risk.
Having said that there has been a recent increase in investors looking to mortgage-backed securities as sound investments there are still those who are weary of investing in the same types of investments that have nearly toppled economies across the world. Even current investors are quick to point out that the mortgage bond market is a very different creature than it was before the financial crisis. For instance, the market is much, much smaller and that very few mortgage-backed securities have been issued since the crisis and finally, that the market, at a total of $1.3 trillion, is half the size it was at its peak and it is continuing to shrink by approximately $10 billion every month.
Clearly, when there is money to be made there are those that are willing to take the risk to get a quick return on their investments. Will those returning to these risky investments further complicate the economic recovery if the market continues to plummet? Only time will tell.
