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A new day for subprime loans

By Judy Martel ·
Wednesday, February 22, 2012
Posted: 6 pm ET

The housing market is showing signs of life and that's sparking a renewed interest in bonds backed by subprime mortgages.

Wednesday, the National Association of Realtors reported that existing-home sales increased 4.3 percent in January from a month earlier, the highest level since May 2010. In 2011, home sales increased 1.7 percent from 2010.

The positive upticks are all it takes to bring out the investors, since the housing market's gains could signal that prices have already hit bottom. But perhaps the surprise is in the fact that some distressed mortgage bonds backed by the once-toxic subprime loans have seen double-digit gains this year, according to the Wall Street Journal.

Subprime mortgages were popular during the housing bubble because borrowers with bad credit were still able to obtain a home loan, albeit at a higher price. When the housing market crashed, those loans were at the heart of it, as homeowners defaulted at a fast clip.

Prices on the distressed mortgage bonds are still cheap because they reflect the worst-case scenario. But many investors with a high tolerance for risk believe the worst is over and want to be poised to capture potentially huge gains as the housing market recovers.

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