Federal Boost May Spur Buyers of Bad Assets

Because non-agency bonds are not backed by Fannie, Freddie or the Federal Home Loan Bank program, there is more implied risk, and therefore, much higher yields. Dave Luczkow, vice president of business development for OptHome, notes that performing loans guaranteed by agencies are yielding 5% to 5.5%, while similar, non-conforming bonds can be above 7%. Di Bias has found opportunities yielding in the mid- to upper teens.

Through the end of the most recent quarter, Di Blasi says his clients "have been very pleased and returns to-date have been positive." Still, he acknowledges that uncertainty about the housing market has pushed less savvy investors out of the game, bringing a liquidity trap along with higher yields.

"These are the same assets that people were champing at the bit two or three years ago to buy at spreads that were excessively tight to the Treasury or swap curve," says Di Bias. "Now that they are at exceedingly wide spreads to the curve, you can't give them away."

Indeed, according to a report issued by several securitization groups, global issuance of loan vehicles has dropped severely. Compared with a height of $3 trillion in 2006, issuance is down more than 80% so far this year on an annualized basis, at $594 billion worth of securities backed by mortgages and other assets.

In light of that environment, the report, titled "Restoring Confidence in the Securitization Markets," notes that market participants do not expect even the most prime vehicles to recover until the end of 2009. They don't expect more complicated assets, like collateralized debt obligations of asset-backed securities to recover until after 2010.