With the housing recovery in full swing, it is now fueling a niche market for newly minted bonds that are backed by the most troubled mortgages of them all: those on homes on the verge of foreclosure, according to an article in DealBook

The demand for securitizations of nonperforming loans illustrates Wall Street’s never-ending hunt for higher-yielding investment opportunities. The market also reflects in part an effort by regulators to close a chapter on the housing mess.

For mutual funds and other institutional investors, the appeal of these bonds is obvious. They have yields of about 4 percent and pay out quickly — often in just two years — if the foreclosure process on the loans in the portfolio goes smoothly. The yields look enticing compared with the current 2.42 percent yield on a 10-year Treasury note.

According to the article the appeal is in the bond's very-short duration and high yield, and while the market for these is still small, the demand is projected to grow as institutional investors search for yield.

So far this year, the article said there have been 28 deal backed by $7 billion worth of nonperforming loans sold to investors.  

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