Cashing in on the mortgage mess

PIMCO Managing Director Bill Gross

TEXT OF STORY

KAI RYSSDAL: Maybe you didn't know this. But there are two categories of single-family homes in this country. "New," and what they call "previously-owned." "Used" just doesn't work, I guess. Anyway, sales of those previously-owned homes fell again in April -- the eighth month out of the last nine that's happened.

Since they're not selling, prices are falling. It'd take almost a year to sell off what's on the market right now. A year's just about as long as the credit squeeze has been going on. A crisis driven in large part by the questionable financing that drove the housing bubble -- mortgage backed securities.

Banks and brokers have been running away from those depreciating assets as fast as they can. Now a highly-respected bond manager is betting he'll be able to cash in. And Marketplace's Bob Moon reports, he's counting on the government to make sure his gamble pays off.


BOB MOON: When the manager of the world's biggest bond fund, Bill Gross, triples his holdings in mortgage debt in just a few months, investors take notice. Gross's $130 billion Pimco Total Return Fund is now 60% full of mortgage-backed securities.

He says he's being careful to buy high-quality mortgage bonds from government-backed institutions -- not what he calls "the subprime garbage." In other words, with taxpayers implicitly guaranteeing mortgages from Fannie Mae and Freddie Mac, how can this bet fail?

At Federated Investors, senior portfolio manager Todd Abraham agrees. He says a bet against these kinds of mortgages is essentially a bet against the Federal Reserve -- which has made it clear it's backing the credit markets:

TODD ABRAHAM: The likelihood of them allowing them to fail is really very, very low. You know, there's that notion that something is too large to fail, and I think that might be applicable in this case.

It was Gross who astutely anticipated the housing market downturn and sold out of his mortgage holdings before the plunge. With housing prices still falling, there's no guarantee the mortgage mess is nearing an end. But Morningstar analyst Paul Herbert says Gross knows what he's doing:

PAUL HERBERT: This is an area where the risks aren't so great compared to the additional compensation over Treasuries, because of the government guarantee, and also because, you know, these borrowers are in better shape than the subprime borrowers we've heard so much about.

As Herbert sees it, there's been enough of a shake-out in the mortgage market to find a few of the shinier coins left on the ground -- and that's what Gross and other savvy investors are now picking up.

In Los Angeles, I'm Bob Moon for Marketplace.

About the author

Bob Moon is Marketplace’s senior business correspondent, based in Los Angeles.

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