Some Wall Street investors made money as the mortgage market boomed; others profited when it fell apart.
Having reaped big gains during both of those turns, Greg Lippmann, a former star trader at Deutsche Bank, is now catching the next upswing: buying the same securities built from mortgages that he bet against before the financial crisis erupted. Mr. Lippmann is joined by other big-money investors — mutual funds like Fidelity as well as hedge funds — in riding a wave of interest in the same complex loan pools that nearly washed away the financial system. The attraction is the price. Some mortgage bonds are so cheap that even in the worst forecasts, with home prices falling as much as 10 percent and foreclosures rising, investors say they can still make money. “Given its significant underperformance in 2011, we believe the product is as cheap to broader markets as it has been in a long time,” Mr. Lippmann, whose portfolio is heavy with subprime mortgage securities, wrote in a recent letter to investors. More broadly, the nascent recovery in the mortgage bond market supports a view that the housing slump may have bottomed out. Sales of existing homes are picking up. State and federal authorities have reached a $26 billion settlement with the big banks that is expected to provide some mortgage relief. And the Federal Reserve Bank of New York has been able to auction off billions of dollars of mortgage securities that it acquired as part of the financial crisis bailouts. “There is light at the end of the tunnel,” said Kenneth J. Taubes, the head of United States investment for Pioneer Investments, a global investment manager that owns these securities. “The mortgage crisis is getting behind us, and things are getting back to some semblance of normality.” That optimism is an about-face from 2006 and 2007, when Mr. Lippmann and others told investors that housing was a bubble ready to burst. On Wall Street, Mr. Lippmann became known as “Bubble Boy,” and one of his traders wore a joking T-shirt that read, “I Shorted Your House.” His exploits were chronicled in Michael Lewis’s best seller “The Big Short,” which described him as somewhat brash and crass. He was known for maintaining a sushi spreadsheet, where he ranked the top Japanese restaurants in Manhattan on ambiance, quality and cost. (He still maintains the spreadsheet.) These days, industry competitors describe Mr. Lippmann, who runs LibreMax Capital, as a more mellow presence. And he is much more positive about the market, telling investors that his fund is reducing its hedge against a potential market crash. Through a spokesman, Mr. Lippmann declined to comment. Others in the industry are also bullish, pouring money back into mortgage securities. Trading has surged in recent weeks. Prices have risen more than 15 percent in the first two months of 2012, after dropping by as much as 40 percent last year. “There was a lot of money waiting on the sidelines because yields were starting to look very attractive,” said Jasraj Vaidya, a strategist at Barclays Capital. “Lots of it seems to have come out now.” Yet the tide could turn again and wipe out investors. Chief among the risks is Europe: the Continent’s banks still hold a significant amount of United States mortgage securities, and if they are forced to sell assets, it could wreak havoc on the market. Washington is a question mark, too. If banks have to pay for loans they issued under dubious circumstances, it would be a home run for investors, who could receive full payment for a mortgage in a security they bought at a discount. But if borrowers whose houses are worth less than their mortgages are able to reduce their principals on a large scale, bond investors could suffer because the securities would be worth even less than they paid. “As a money manager, you can’t close your eyes to that potential outcome,” said Jeffrey Gundlach, a founder of DoubleLine Capital, who has been buying mortgage securities since 2008. “To believe that this time we are really out of the woods and the prices will not drop again is dangerous. People made that argument a year ago.” The mortgage bond market is a very different creature than it was before the financial crisis. For one, it is much smaller: very few residential mortgage-backed securities have been issued since the crisis. The market, at $1.3 trillion, is half the size it was at its peak and shrinks by an estimated $10 billion every month. Despite the limited supply, prices remain cheap, in part because the assets are difficult to value. Hedge funds and big investors use computer systems to analyze the underlying loans and estimate, among other things, how many borrowers will default and how much money can be recovered in a foreclosure. Take one security, JPALT 2006-S1 1A11, which was built from Alt-A loans, or mortgages that required little documentation verifying a borrower’s income. On the surface, the numbers are not encouraging: of the 799 mortgages underpinning the bond, many in foreclosure-heavy California and Florida, about 21 percent are more than 60 days late on payments. The annual default rate is about 7 percent, and of the homes sold out of foreclosure, investors take a 54 percent hit, according to data from Bloomberg. On average, about 5 percent of the homeowners refinanced their mortgages before they were due over the last 12 months. That bond recently traded at nearly 70 cents on the dollar.
Current DateTime: 11:34:06 19 Feb 2012
LinksList Documentid: 22528753At that price, even if defaults and the losses increase, an investor can still make more than 5.4 percent, an analysis shows. In a rosier prediction, where defaults drop slightly and the losses on the sale of foreclosed homes stay flat, the bond returns nearly 8.7 percent. “Price is a wonderful thing,” said Chris Flanagan, an analyst with Bank of America Merrill Lynch. “Yields in this market range anywhere from 4 or 5 percent up to 12 percent.” With long-term interest rates close to zero, such returns are hard to resist — even for investors who were punished in the housing bust. The American International Group, whose mortgage securities were acquired by the New York Fed in its more than $100 billion bailout in 2008, has been buying back some of those bonds. And a former mortgage team from Lehman Brothers, which went bankrupt in 2008, formed One William Street, a hedge fund that manages more than $3 billion in assets. As for Mr. Lippmann, his reputation has made it both easier and more difficult to get commitments from investors. Some are impressed by his well-publicized bet against the mortgage market; others are turned off by his high profile in an industry known for secrecy and discretion. LibreMax, made up of several members of Mr. Lippmann’s team from Deutsche Bank, has raised more than $1 billion in a little over a year. His performance has been relatively strong during a period of market turmoil — up 2 percent last year and a little more than 6 percent since launching. Like his rivals, Mr. Lippmann cites his experience in the housing market — including its boom and bust — as a principal selling point for his fund. “Because we have a trading history, I think we understand very well how the street works, better than perhaps people who didn’t work in trading before that haven’t had that experience,” he said at a Bloomberg hedge fund conference in 2010. This story originally appeared in The New York Times
![]()
View the original article here
Analysts and traders have been expecting a pull back for several weeks now. Stocks have gained more than 20 percent since October and have run straight up since late December. But most expect a relatively shallow pull back of 3 to 5 percent.On Wednesday, the Dow turned south, and was off 27 at 12,938, after flirting with the psychological 13,000 level a day earlier. The S&P 500 also moved lower, down 4 at 1,357, now 7 points below its 2011 close and 13 points below the key 1,370 intraday high of 2011.“I continue to like the market. I believe that we are on good footing, and I think that even though a near term dip may occur that investors should accumulate on that dip,” said Paul LaRosa, chief market technician at Maxim Group.“The key number is 1,370, on the S&P, and if we don’t penetrate that in the next week or two that could indicate a negative divergence,” said LaRosa.Thursday’s big number is weekly jobless claims, expected to come in at 355,000 when it is released at 8:30 a.m. EST. FHFA home price data is released at 10 a.m. and there are a few morning earnings, including Kohl’s, Target, Liberty Media, Dish Network, Echostar, Foster Wheeler, Hormel, Safeway, American Tower and CMS Energy. AIG, Gap and Salesforce.com report after the closing bell.Apple’s [AAPL Loading... () 
] shareholder meeting is at 1 p.m. and traders will be watching to see if there’s any talk about a much speculated on dividend, which would be a first from the cash-rich company.Traders are also watching 13,000 on the Dow, which it touched briefly on Tuesday. They see it as a big round number that could act as a magnet for investors who have been underweight stocks.LaRosa said stocks will be attractive unless U.S. economic data begins to sour. “Right now, I’m seeing green lights,” he said. He said technically the market is strong. “With so many charts, it’s that concrete base, that foundation. I think this house has a foundation even if a little storm comes by,” he said. A good sign for the market was when the Dow pushed through last year’s high earlier this month, he said.“We may just keep marching higher. I think it’s not the news, it’s the reaction to the news. I think people are getting too concerned with headline risk… I think at this point the headline risk is overdone,” said LaRosa.Steve Massocca, managing director at Wedbush, said he sees the market as a “sell” at current levels, but he would be a buyer if it fell several percent. “I think we see a lot of risks of a very elevated market. On the other side of the argument, I get the feeling the world is very underinvested in stocks and fixed income securities are basically yielding nothing. There’s an impetus for people to buy stocks. I don’t think we’ll get a significant decline, but we’ll probably back off these prices and I we think we’ll see a correction,” said Massocca.He said the S&P could dip back down to 1,300.One risk that traders have been watching is the rising tensions between Iran and the western nations that have imposed sanctions on it in an effort to stop its nuclear program. Oil has risen sharply as a result, and was up just slightly Wednesday at $106.28 per barrel. London Brent crude [LCOCV1 Loading... () ![[cnbc explains]](/CNBCexplainsicon1.gif){kind=small}
carries out its next long term refinancing operation, or LTRO. She said the market also awaits news on Greece’s deal with private creditors. “Those are the two pieces of news that could drive euro dollar. For now, the market has settled down and is rangebound,” she said.She said the market is also watching the weekly jobless claims number to make sure it remains below 400,000, indicating an improving labor market. “If we do get below 400,000 again, it would be the fifth straight week that we get it. I think it will be pretty important,” she said.What Else to WatchEIA oil inventory data is released at 11 a.m., while natural gas storage data is reported at 10:30 a.m. The Treasury holds a $29 billion 7-year note auction at 1 p.m.Dallas Fed President Richard Fisher will appear on CNBC’s “Squawk Box” at 8 a.m.Follow Patti Domm on Twitter: @pattidommQuestions? Comments? Email us atdocument.write("");document.write("marketinsider"+"@"+"cnbc.com");document.write(''); Disclaimer