New York Fed’s Maiden Lane Sales Top $27 Billion

Credit Suisse Group AG was among buyers of $828 million worth of mortgage securities left over from the bailout of insurer American International Group Inc., according to a person familiar with the sale.

The auctions of collateralized debt obligations and residential mortgage-backed securities were the latest sale from a Federal Reserve Bank of New York portfolio taken on during the 2008 AIG rescue.

They bring total sales from the vehicle known as Maiden Lane III to about $27.5 billion in face value this year and reduce the remaining portfolio to about $18.7 billion.

The New York Fed is taking advantage of demand that has persisted even as concern over global economic growth has steered investors away from many risky assets. The potential for high returns, signs of stability in the housing market and a shrinking supply of securitized assets have spurred interest in the so-called nonagency mortgage sectors that produced steep losses for investors in 2011.

« The view on housing is that we have bottomed and the worst is over, so that’s fundamentally positive » for nonagency bonds, or those that don’t carry any federal backing, said John Sim, a mortgage-bond strategist at J.P. Morgan Chase & Co. Furthermore, « there are just not many bonds out there with yields like nonagencies, » he added.

Sales from Maiden Lane III and two similar crisis-era portfolios have already led to the full payoff of more than $70 billion in loans made by the New York Fed. A New York Fed spokeswoman didn’t immediately return a call seeking comment.

J.P. Morgan expects U.S. home prices will post a 1.6% drop in 2012 and then rise by 1.4% in 2013, 3.7% in 2014, and 4.4% in 2015, as demand is predicted to begin to match the supply of homes for sale for the first time since 2007. Falling home prices reduce the amount an investor can get if a defaulted loan results in foreclosure and sale of the property.

Prices on some nonagency mortgages that posted double-digit losses in 2011 have gained 15% or more this year. Bonds backed by so-called option adjustable-rate mortgages—one of the riskier types of nonagency bonds—in June traded at 49 cents on the dollar, up from 42.5 cents on the dollar in December, according to Amherst Securities Group.

ABX indexes of subprime mortgage bonds are also at their highest levels in more than a year, according to Markit.

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Wall Street Journal

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