The New York Times reports that Greg Lippmann, made a star by author Michael Lewis in The Big Short, for making millions on the housing collapse, is now taking the other side of the bet and buying mortgage backed securities.
On the surface one wonders what he’s thinking. As Azam Ahmed writes,
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.
However, JPALT 2006-S1 1A11 is trading for 70 cents on the dollar, making the security a compelling buy. An investor can still make more than 5.4 percent even if defaults increase, according to Ahmed. And even a slight improvement in the default rate would send returns as high as 8.7 percent.
“Price is a wonderful thing,” said Chris Flanagan, an analyst with Bank of America Merrill Lynch. What was “toxic” at 100 cents on the dollar is compelling at 70 cents.
When prices are allowed to adjust, markets clear. Imagine, if wages were allowed to fall or banks and the GSEs were allowed to fail.