Federal Boost May Spur Buyers of Bad Assets

The major challenge to wooing investors back to the market is that they are rife with uncertainty over how far home prices will drop and how long the economy will take to recover. That uncertainty makes it difficult to ascertain the value of underlying mortgage assets and the financial stability of borrowers who undertook the loans. As a result, buyers for banks' troubled assets are few and far between, says Benjamin Pace, U.S. CIO of Deutsche Bank's (DB Quote) private-wealth management group.

"They might be able to sell them off to distressed securities funds, but we don't see that happening yet," Pace says. "The market is not there as long as prices are getting marked down."

When Merrill Lynch (MER Quote) sold a large portion of its bad assets to the private-equity group Lone Star Funds for 22 cents on the dollar in July, it created something of a benchmark for such transactions. Some heralded Merrill for dumping the assets, while others scoffed, saying the loans were enormously undervalued. But in a market where those calling out for buyers are met mostly with echoes, the fair value tends to be the one offered.

Similar assets can trade in a wide range of 20 cents on the dollar to 80 cents on the dollar, according to Andrey Krakovsky, who dealt in the market as a former director and portfolio manager at the hedge-fund firm Highland Financial Holdings. Krakovsky notes that not all mortgage securities were created equal, and it takes a sophisticated investor to separate the wheat from the chaff. Furthermore, he adds, not every investor has the patience to wait for soured mortgage assets to return to par value.