Federal Boost May Spur Buyers of Bad Assets

The federal government has abandoned the idea of buying toxic mortgage securities at the heart of the credit crisis, but Uncle Sam may still grease the wheels for the private sector to do such deals and get credit markets flowing again.

The Term Asset-Backed Securities Loan Facility, or TALF, unveiled last week is intended to provide up to $200 billion to finance purchases of consumer loans like auto, student and credit-card debt. Treasury and Federal Reserve officials say the program could later be expanded to include commercial mortgage-backed securities, residential mortgage-backed securities not guaranteed by Fannie Mae (FNM Quote) or Freddie Mac (FRE Quote).

If it does, it could fill a gaping hole created by the change in direction to the $700 billion Troubled Asset Relief Program, or TARP. The rescue plan originally intended to buy up such assets, which had become impossible to sell as investors' fear of defaults mounted, but the government abandoned that idea before it got off the ground. That left non-agency, mortgage securities available at fire-sale prices and very attractive yields -- for anyone with the risk tolerance and financing to buy them.

"For investors with a sharp eye and steady nerves, we believe value is waiting to be discovered in the non-agency mortgage and asset-backed securities markets," Dean Di Bias, high-yield portfolio manager for Advantus Capital Management, wrote in a recent report.

In an interview, Di Bias said distressed funds such as his are exploring opportunities in the space, along with hedge funds, mutual funds, banks and institutional investors. He has been pursuing the strategy since April, and his criteria are strict. Bonds must have high ratings and ample credit support, or be backed by mortgages with minimal delinquencies or defaults, and borrowers who have lived in the home for an extended period of time.