Mortgage-backed securities rise again

Foreign banks got out of the business of these securities, but they're jumping back in now.

By Kim Peterson Jul 15, 2010 2:40PM
house for sale  © Getty Images Mortgage-backed securities are hot again, despite the prominent role they played in the global financial crisis.

Foreign banks in particular pulled out of the business altogether after getting badly burned. But now, they're jumping back in because they have to stay competitive with American rivals, the Financial Times reports.

European and Japanese banks are aggressively hiring Wall Street traders, and setting them up in New York to concentrate on the American market.  And so the cycle begins again.

But it's a little different this time. Before, the banks would hardly bat an eye at swapping subprime mortgages. A McDonald's cook with a mortgage 10 times his annual salary? No problem!

Now, banks like UBS and Nomura are joining others in focusing on higher-caliber mortgages backed by Fannie Mae (FNM) and Freddie Mac (FRE).

"Investors have snapped up these securities in recent months because they are considered about as low-risk as US Treausry bonds, but offer a higher yield," writes Suzanne Kapner.

Low risk? The cost to bail out Fannie and Freddie has climbed to $146 billion so far, and could ultimately cost taxpayers as much as $389 billion.

When that is considered "low risk" on Wall Street, you know the problems have not been fixed.

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