John Paulson, founder and manager of Paulson & Co., made $15 billion in 2007 betting against U.S. subprime mortgages, and he seems to be just as bullish on property investments today. According to Bloomberg, Paulson “is sticking with bullish investments in residential and commercial mortgage securities, helping his Credit Opportunities Ltd. fund gain about 1 percent last quarter to narrow its 2011 decline to 18 percent.”The renewed demand is “to fuel a rebound that’s allowing the Federal Reserve Bank of New York to attract buyers for bonds it took over during the rescue of American International Group Inc. (AIG) in 2008,” writes Bloomberg. “Neuberger Berman Group LLC, Pine River Capital Management LP and Metacapital Management LP also see value in the $1.1 trillion market for non-agency debt, or home-loan bonds without government backing.”
“It’s the second-most compelling opportunity for hedge funds by far,” says Troy Gayeski of SkyBridge Capital. “Investors can make attractive returns without any improvement in the economic landscape.” Point in fact, commercial-mortgage debt is at more than 63 cents on the dollar right now, up from just under 47 in October and subprime residential bonds are poised to continue gaining. Gayeski explains, “While non-agency securities may fall further if Europe’s banks need to sell assets, in a doomsday scenario of home prices declining as much as 30 percent and unemployment reaching 20 percent, the bonds are priced so low an investor could probably avoid losses by holding to maturity.”
“While the housing market continues to face some weakness, the recent correction in MBS prices has been more severe than justified by underlying real estate market fundamentals,” said Paulson in a letter to investors in October. “This creates an opportunity to benefit from very attractive yields on both” residential and commercial mortgage securities.