There’s an old adage in the commercial property development business: it’s never the first investor, but usually the third or fourth, that ends up making money on a project. It’s an adage that seems apropos to the mortgage-backed securities business these days, as well, given that the market remains largely frozen amid the perception that many of the bonds in question yet have further to fall in value. Monday’s Wall Street Journal picks up the trail of a story we’ve been covering here at HW pretty extensively for the past six months, and notes that while money is piling up on the sidelines of the RMBS wreckage, there aren’t too many funds yet jumping in to buy paper that many still fear may ultimately be on what one market participant characterized as “a race to zero.” “We think that there are limited opportunities currently,” Alistair Lumsden, a senior portfolio manager at London hedge fund CQS LLP, is quoted as saying in the WSJ story. There are two sides to the distressed mortgage market, of course, something the Journal story misses: the bond side, which is still a smoldering and smoking heap of mess, and the whole loan side. While subprime MBS may not yet be attracting strong investor interest, whole loans most certainly are, and by most accounts are trading relatively briskly. “Portfolioed mortgage loans are a growth opportunity right now in distressed debt,” said one fund manager, who asked not to be identified in this story. “We’re seeing sellers like GMAC and Citi looking to clean up their balance sheets and reduce risk exposure, among a few others.” Some very large funds have already jumped into the whole loan acquisition side. One such example is San Diego-based National Asset Direct, backed by a syndicate of unnamed institutional investors; BlackRock Inc. (BLK), the biggest publicly traded U.S. asset manager, said in March it was backing a new company called Private National Mortgage Acceptance Co. LLC, also known as PennyMac, that will focus on whole loan acquisition and restructuring. Marathon Asset Management, LLC, a global investment manager with $10.6 billion under management and over $20 billion in assets, is also buying up distressed mortgages from other lenders’ portfolios. It’s not currently known just how much mortgage volume has been put into portfolio on a whole loan basis by private party market participants — a number sure to reach well into the hundreds of billions — but as the secondary markets began seizing up early in 2007, lenders ended up carrying plenty of whole loans on their books. “Enough subprime and Alt-A junk was put into portfolio in the past 12 months to get us started,” said one fund manager, who asked not to be identified. “We’ll move into RBMS when the first-loss opportunity is there, but that’s not right now.” Buying troubled whole loans usually involves more control over potential losses, sources told HW; many of the funds now competing to buy assets in this space have their own captive servicing shops to board the loans they purchase. In comparison, dealing with distressed mortgages on the securitized side of the market usually entails buying equity positions in securitized deals, as well as any associated servicing rights on the loans involved; it’s a model that sources say is more constrained by existing pooling & servicing agreements, as well as competing investor interests. “If you buy into a AAA position right now, you have to wonder what security you’re really buying,” said one source. “And if you go scratch-and-dent, trying to service your way out of first loss in the equity position, you’re pretty much stuck as well, with mushrooming losses and comparatively less flexibility to service the mortgages the way you’d really want to. “There just so much more risk [in mortgage bonds] right now, rather than whole loan acquisition.” Disclosure: The author held no positions in publicly-traded firms mentioned herein when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.