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Barclays finds some mortgage bond gems for investors

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Investors should consider buying bonds backed by Federal Housing Administration and Veterans Administration re-performing deals, says a report released Friday by the investment banking arm of Barclays Capital. Re-performing loans are those on which borrowers missed some payments but then resumed paying on time. “Senior bonds from FHA-VA re-performer deals provide a very stable yield profile even in dire economic scenarios and look very attractive with leverage,” said analysts Sandeep Bordia, Jasraj Vaidya, Dennis Lee and Aaron Haan. Since re-performers are less likely to succeed in refinancing, the duration risk is more hedged, they said. The report estimated the size of that market at $18.4 billion, with roughly 60% in agency residential mortgage-backed securities, and the rest concentrated among a few other issuers: Lehman Brothers Holdings, Goldman Sachs, Countrywide and UBS. Because the FHA and VA imposed strict underwriting standards, default rates on loans they guaranteed are typically much lower than on other subprime loans, even those where borrowers have missed some payments, says Barclays Capital. And the government guarantees, which cover much, though not all, of investor losses, make bonds backed by FHA and VA loans a good bet, says the report. It estimates that senior bonds backed by FHA and VA re-performing loans can deliver yields of 6% to 8%. Using leverage, investors may be able to magnify their returns to anywhere from 15% to 30%, Barclays analysts calculated after analyzing two different leverage scenarios. "Further home price depreciation and/or a double-dip recession may increase defaults and severities on these pools," concluded the report. "However, we believe that even in a draconian scenario, in which defaults or severities triple, yields should hold up relatively well." Write to Liz Enochs.

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