Recent gains mean residential debt no longer offers "double-digit" returns, Bill Roth, co-chief investment officer of Two Harbors Investment Corp., said on a Feb. 8 conference call with analysts. Two Harbors is a publicly traded REIT run by hedge-fund firm Pine River Capital Management LP; both have said they've been buying subprime debt
"Still, if you compare it to almost anything else that's available -- in an interest rate environment where the 10-year Treasury is below 2 percent, and most other fixed income assets yield 6 percent or less -- yields of 7 percent, 8 percent, 9 percent are still appealing," Roth said.
That's not even taking into account the "free lottery ticket" given by President Barack Obama's legislation that would enable refinancing of borrowers into government-backed loans, which has been given small odds of passing Congress, said Tom Siering, CEO at Two Harbors and a partner at Pine River.
The bounce in prices may not directly help lenders. While the five biggest U.S. banks held about $115 billion in mortgage securities without government-backing as of Sept. 30, the most- recent regulatory data available, changes in their values mostly don't turn up in the lenders' earnings because of their accounting policies.
Higher prices do mean it's more likely that U.S. banks can sell off bonds if they want to restructure their portfolios, said Marty Mosby, an analyst at Guggenheim Securities LLC in Memphis, Tennessee.
Barclays Capital analysts led by Ajay Rajadhyaksha said in a Feb. 10 report the strong reception to the Fed's sales may also "entice" European banks into attempting to offload debt, a move that could set the market back.
U.S. banks hold $780 billion of delinquent first mortgages, with $124 billion of that amount representing borrowing above the value of the homes serving as collateral, according to data from the JPMorgan analysts.
Banks' mortgage losses are "going to improve relative to what they were last year and remain elevated compared to historic norms" at least through 2013 because of borrowers' negative equity and loan modifications, Mosby said. That means charge-offs of about 1 percent, about double the typical rate.
For all the gains in the market, issuance may not be any closer to reviving. Less than $1.5 billion of new U.S. mortgages have been packaged into securities without government backing since mid-2008, compared with the record of about $1.2 trillion in each of 2005 and 2006.
That's part of the downside of all the cheap bonds. Buying and securitizing new loans just doesn't look attractive yet in comparison, according to Siering.