Mortgage-backed securities were some of the most-sought-after paper on Wall Street not so long ago, when the residential real estate market was still cruising along smoothly. The yields were solid and risk was seemingly minimal. Everybody and his nephew wanted at least some of them in their portfolios.
Then the mortgage securities business rolled right over the cliff, shoved there by the rapidly-deteriorating housing market. And the deep hurt was on, felt all across the industry. Now even well-qualified borrowers find it challenging to obtain a home loan, for refinance or purchase, as requirements have tightened considerably. The government had to step in and has been buying mortgage-backed securities to maintain some liquidity on the secondary market. The private money that used to participate there in a meaningful way just about disappeared altogether after absorbing huge losses on their prior investments.
The tide may be turning, though.
China Investment Corp., or CIC, is rather serious about investing in noxious, some prefer to call them toxic, mortgage-backed securities. It would happen under the Public-Private Investment Plan, or more affectionately PPIP, where the U.S. government creates public-private funds using taxpayer and investor money to purchase chunks of this nearly worthless paper from banks. CIC is for now planning to put in play about $2 billion, which really is only a couple of drops in the bucket.
The interest in mortgage securities is cautiously returning, obviously, is the important news here. Whether it comes from a Chinese entity or Las Vegas pension fund or someone else is immaterial. Somebody has to show the way and that in turn will attract others to at least come and sniff around.
The real estate market is showing some signs of turning around, although in some areas more so than in others. That's what CIC is evidently betting on. It must've done its homework and feels that plunking down $2 billion at this stage is well worth the risk. If it's right, it'll be well rewarded. Undoubtedly the rest of the investment fraternity is watching, and deliberating, this with great interest.